House prices in many European countries are 15% to 20% too high and have doubled since 2015 in a number of countries including the Netherlands, Czech Republic, Hungary, Iceland, Luxembourg and Portugal, the International Monetary Fund said in a new report on the regional economy.

Since the pandemic, the gap between house prices and income, and between house prices and rents, has widened further, the IMF said. It argues that price-to-income ratios currently stand at more than 30% above their long-term trends.

‘Empirical models linking house prices to their fundamental drivers point to an overvaluation of 15–20% in most European countries,’ the agency said. ‘Therefore, with mortgage rates still on the rise and real incomes dented by inflation, house prices have been declining recently in many markets.’

In the Netherlands, house prices fell an estimated 8.2% in the first quarter of the year, year on year, the biggest decline in 10 years.

In addition, rising living costs and mortgage rates are stretching spending, and disposable income would be hard hit if there were additional economic shocks, the IMF said.

Europe-wide the share of households that could then struggle to afford basic expenses (food, utilities, rents, debt repayments) is likely to increase by 10 percentage points in 2023, the IMF said.