A strong housing market across Europe has been sustained as a result of lower interest rates in the euro zone, which has kept up demand, according to new research from the Royal Institute of Chartered Surveyors. The latest annual survey of European housing markets, released today by RICS, looks in detail at the housing markets in fourteen European countries.

In the run-up to the introduction of the euro, many homeowners took advantage of low interest rates to re-mortgage and use the extra capital to support and stimulate the retail market. But towards the end of 2001 the house price boom experienced in most countries showed signs of ending and the market began to divide into three distinct areas:

In France, Holland, Belgium, Germany, Ireland, Italy and the Scandinavian countries, the market has shown real signs of cooling. Prices are going flat, but there is no sign of a collapse in the market. In Greece, Switzerland and the U K, prices continue to rise. In Spain, prices have reached levels that could prove to be unsustainable.

Thriving regional economies help drive local housing markets, but this can be hidden in the overall national information. London, Stockholm, Madrid, Helsinki and the Dutch Ranstad have all experienced such long-term booms. Supplies of properties tend to be weaker in these areas than other parts of the same country, which can lead to greater price and market volatility in the capital city regions than elsewhere.

The continued availability of property at the right price and in the right location will become increasingly important for mobility of labour across the EU, as many countries move away from social dwellings to improve supply.

Affordability could become an issue, particularly as key workers and people on modest incomes already have difficulty in finding suitable housing in urban areas in many countries. This is particularly likely due to the lack of supply to meet demand - a common feature in almost all countries in the Euro zone. Most countries have policies that limit the amount of land available for building. Many, the Scandinavian countries in particular, have the extra burden of high building costs.

There is growing concern among financial institutions across Europe that the high levels of borrowing at low rates will leave homeowners vulnerable should interest rates increase sharply.

The author of the report, Professor Michael Ball, of London's South Bank University said: "Interest rate cuts by the European Central Bank resulted in the housing market becoming a major influence in stimulating the economies of the euro-zone. The housing markets outside the euro-zone, such as the UK, are also behaving in a similar fashion, suggesting that housing market behaviour in the EU is coming closer together.

Supply shortages and affordability are likely to remain key issues. Affordability problems do tend to be corrected by market readjustments at the end of periods of strong house price rises. The lack of supply across the growth regions of Europe may need changed land policies, to avoid house prices and rents rising beyond the reach of many. This situation also has serious implications for labour mobility and labour market flexibility in the EU."