Property price dynamics: domestic and international drivers

Report prepared by a Study Group chaired by Paul Hilbers (Netherlands Bank)

Central banks closely monitor developments in property markets given the central role that boom-bust cycles in real estate have played in generating financial system fragility in the past. 

This report documents recent trends in residential and commercial property prices, provides an overview of their drivers, including the role of international investors, and describes policy initiatives undertaken to mitigate vulnerabilities arising from property price growth. 

The report has three main findings. The first is that property prices have been rising, reaching record highs in many countries. In some jurisdictions, prices appear elevated when judged against simple rule-of-thumb benchmarks, such as rents or incomes. Elsewhere, current price levels are reasonable when judged against fundamental drivers. The second is that although prices (both residential and commercial) have become more synchronised over the past few years, this does not mean that there is a global real estate market. There is still significant cross-country heterogeneity in price dynamics, which reflects differences in the strength of local drivers. A third finding is evidence of international investors' expanding footprint in many markets. From a policy perspective, their growing importance presents challenges since foreign demand is less sensitive to macroprudential measures that affect the supply of domestic credit for property investments.

JEL classification: R21, R31, R33