House price growth top in Estonia

Estonia, land of booming house prices

House prices in Estonia rose by more than any other European country last year, the Royal Institution of Chartered Surveyors (Rics) has found.

The Rics report on the European housing market shows that Estonian house prices rose by 28%, ahead of Denmark at 22%.

By contrast UK house prices rose by just 2%, while prices in Germany actually dropped by 2%.

The report suggests that prices in Northern Europe are now catching up with those in the Mediterranean.

See how house prices have changed in each European country

What is going on?

It is not just in the UK that home owners have seen their value of their homes shoot up.

The whole of Europe has been going through a house price boom during the past seven years and Rics predicts that this will continue in 2006.

But the market is still clearly made up of different national markets dominated by very different forces.

In Germany lots of houses have been built and there has been subdued economic growth for the past few years. As a result, house prices have been stagnant.

Denmark and Estonia

In neighbouring Denmark the changing nature of the mortgage market has given a boost to prices.

Previously people there took out home loans for between 20 and 30 years, often at fixed rates.

Now the mortgage market is looking more like that of the UK.

Increasingly residents can take out mortgages where the interest rate varies annually, or where only interest is payable each year.

That means would-be home owners can borrow more money than before and at cheaper rates too, thus driving up prices.

In Estonia, a country with just 1.3 million people and a small property market, the big influence has been overseas buyers.

"A few hundred overseas investors have had a big impact on a small market," said the author of the Rics report, Professor Michael Ball of Reading University.

UK influence?

It is sometimes suggested that houses prices in countries such as France and Spain are affected by the UK.

The idea is that booming prices here over the past 20 years or so have fuelled the ability of UK residents to buy holiday homes abroad, thus driving up prices in some foreign countries.

But Professor Ball reckons this may apply only to certain holiday areas.

"France has about 30m homes but only 260,000 UK residents own homes there," he said.

"And most of them don't own them in the big cities like Paris, Marseille and Lyon where prices have been growing strongly."

Although French house price inflation slowed in 2005 it was still just above 10%.

Professor Ball says the reason why the European property market been so buoyant, with prices rising strongly above inflation, is fairly straightforward.

"People want better quality homes, want more of them, and low interest rates enable them to do so," he said.

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