In the long run, the increase in real house

prices is mainly correlated with the rising

cost of land for construction use.

Despite rents rising more slowly than house

prices in most EU countries, it may have

become more economical in recent years for

households to buy rather than rent, because

of the fall in interest rates. This is likely to

have resulted in declining demand for rented

accommodation, contributing further to the

relative shrinking of the rental sector.

Despite the rapid

rise of mortgage debt, the ratio of debt

servicing costs to income is estimated to have

remained relatively constant in the second

half of the 1990s, because of falling mortgage

interest rates and rising incomes. The ratio

has been rising in different EU countries since

2000.

In view of

this, careful consideration should be given to

the evolution of households’ indebtedness

and to the appropriate risk assessment

procedures.

Second, rents are an

important component of the consumer price

index and therefore need to be closely

monitored in the assessment of the risks to

price stability.

Residential investment represents

about 4.9% of the gross domestic product

(GDP) in the EU and 5.5% of GDP in the

euro area, varying between about 2.1% to

8.8% of GDP in the different countries

If the increase in house prices is due to a

decline in interest rates (which is expected

to be long lasting and not related to lower

growth expectations), then a positive effect

on (non-housing) consumption is more likely

to emerge, as the gain of homeowners would

not be accompanied by a loss of prospective

new buyers. The latter could also finance the

acquisition of a house at a lower cost

If the increase in house prices is due to a

decline in interest rates (which is expected

to be long lasting and not related to lower

growth expectations), then a positive effect

on (non-housing) consumption is more likely

to emerge, as the gain of homeowners would

not be accompanied by a loss of prospective

new buyers. The latter could also finance the

acquisition of a house at a lower cost