The spectacular growth of prices in the US housing market as a driver of domestic demand has become so important that policymakers and market participants routinely add a health warning to their outlooks for the US economy related to the housing market: if the latter weakens, so will the entire economy. It is generally assumed that the eurozone does not face a similar prospect, because areas of "froth" - Spain, for example - co-exist with areas of declining prices, such as Germany.

However, this widely held assumption is wrong. Housing prices in the euro area have, on average, increased as much as in the US. A euro area-wide aggregate index of real housing prices constructed by us has risen almost as much as that of the US over the past decade and is now, like that of the US, about 40 per centabove its 30-year average. This is equal to the overvaluation of Japanese property at the height of the Japanese bubble, which was then followed by a decade of decline.