European house price inflation hotspots are shifting from the sunny south to Northern Europe, reveals an independent survey by the Royal Institution of Chartered Surveyors (RICS) published yesterday.

After several years of high growth in Europe’s Mediterranean regions, fuelled by the second homes boom and  strong economic growth, countries in the north of the continent are starting to catch up, in what remains a generally buoyant European market.

The RICS European Housing Review 2006 looks at the performance of 18 European housing markets in 2005, analysing trends across the continent in areas such as inflation, building activity, mortgage markets and turnover.  It shows that Denmark, with price growth at 22%, and Estonia at 28%, now top the price inflation league.  Spain (15%) and France (10%), who were 2004’s leaders, are now third and fifth, with Swedish house price rises (12%) putting the country in fourth place.

Of the countries surveyed 12 had inflation at 7% or more, with seven of these above 10%. This buoyancy is in part due to mortgage lenders taking a more relaxed approach to loans criteria; a sign of growing acceptance of the probability of price growth across the continent. In The Netherlands, for example, 60% of all mortgages are where the loan to value ratio is above 100% (ie, where the amount lent is more than the value of the property).  Competition makes mortgage industries more efficient and open, increasing the availability of housing finance. Greater liberalisation of mortgage markets in the EU is currently being looked at by the European Commission so this trend may well gain pace.

With house price inflation at just above 10%, France remains the only one of Europe’s big four major economies whose market remains above this threshold. Germany’s long moribund house prices stayed flat, while an expected Italian recovery was short lived. The UK’s famously active market was quiet in 2005 after responding to Bank of England-led efforts to slow it down the previous year. Ireland’s prices increased by nearly 10% despite predictions of a slowdown.

The report’s author, professor Michael Ball, said:  ‘Northern Europe saw some of the strongest house price rises last year, so the centre of gravity of Europe's house price inflation seems to be heading north. 2006 contains growing risks for housing investors with rising interest rates in the eurozone and fears of greater currency volatility to contend with. Even so, the thirst for cross-border European residential investment is unlikely to be quenched in 2006.’

Milan Khatri, RICS chief economist, added: ‘We expect the European house price boom to run into its eighth year in 2006, with the market supported by a clear upturn in economic activity and income levels.  Further interest rate rises by the European Central bank (after the 0.25% increase last week) are certain, which will restrain but not prevent additional price rises. As mortgage interest rates are likely to remain at close to historically low levels, any talk of a real European housing market slowdown is premature.

RICS estimates that 200,000 UK households own at least one property overseas.