House price rises of a little over 5 per cent would barely make
the Federal Reserve, or the Bank of England, blush. Not so at the
Bundesbank.
This is what Jens Weidmann, Bundesbank president, had to say back in March:
Mr Weidmann has signalled that Buba will act if it thinks the boom is getting bubblicious, possibly through macroprudential measures such as limits on loan-to-value ratios, which cap the amount mortgage holders can borrow against the value of their property.
Klaus Baader at Société Générale is more relaxed, however. In a research note out Tuesday, Mr Baader argued that the Bundesbank’s were “if not without base, certainly premature”. How so? Because German house prices are, he says, “laughably cheap”.
Mr Baader uses the chart above to show that, counter to trends in other advanced economies, German house prices declined in the run-up to the crisis. He claims that, in real terms — once the impact of inflation on private consumption is taken into account — German house prices have declined by 23 per cent. Property prices also failed to keep pace with wage growth. At the same time, renting has become far more expensive than buying (according to the research, only two-fifths of Germans own their main residence).
Mr Baader goes on to note that there is little to suggest a credit bubble in the German mortgage market, with annual growth of a reasonable 1.2 per cent since November.
First, as the research notes, interest rates are at record lows. Just the sort of environment, then, that contributed to the US housing boom.
Second, German bonds and equities are offering poor returns for the country’s savers, making property an even more attractive investment.
Mr Weidmann is right to want to keep a close eye on German house prices. Even if policy action is not yet needed.
This is what Jens Weidmann, Bundesbank president, had to say back in March:
Jens Weidmann: We will see inflationary pressures rise in Germany. We already see that partly in some markets, such as real-estate. House prices increased by 5.5 per cent last year, which is not impressive by London standard, but still for Germany is something that we will need to watch.The house price boom has gathered pace. The most recent data from the OECD shows that German house prices rose 9.5 per cent in the year to Q1.
Mr Weidmann has signalled that Buba will act if it thinks the boom is getting bubblicious, possibly through macroprudential measures such as limits on loan-to-value ratios, which cap the amount mortgage holders can borrow against the value of their property.
Klaus Baader at Société Générale is more relaxed, however. In a research note out Tuesday, Mr Baader argued that the Bundesbank’s were “if not without base, certainly premature”. How so? Because German house prices are, he says, “laughably cheap”.
Mr Baader uses the chart above to show that, counter to trends in other advanced economies, German house prices declined in the run-up to the crisis. He claims that, in real terms — once the impact of inflation on private consumption is taken into account — German house prices have declined by 23 per cent. Property prices also failed to keep pace with wage growth. At the same time, renting has become far more expensive than buying (according to the research, only two-fifths of Germans own their main residence).
Mr Baader goes on to note that there is little to suggest a credit bubble in the German mortgage market, with annual growth of a reasonable 1.2 per cent since November.
Klaus Baader: The fact that there is no credit bubble does not in itself mean that a property price bubble may not develop. But it does suggest that what is occurring in Germany is more a relative re-pricing of real estate than outright real estate inflation driven by credit.But, as Mr Baader points out, this “repricing” may go too far. There are two reasons to think conditions are ripe for a German housing bubble.
First, as the research notes, interest rates are at record lows. Just the sort of environment, then, that contributed to the US housing boom.
Second, German bonds and equities are offering poor returns for the country’s savers, making property an even more attractive investment.
Mr Weidmann is right to want to keep a close eye on German house prices. Even if policy action is not yet needed.
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