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Nice city life: for many people no longer affordable
Photo:
hanohiki / Getty Images / iStockphoto
The New Zealand government recently took an almost revolutionary step: It committed the central bank in Wellington to stabilizing property prices in the future.
If living space quickly becomes more expensive, the monetary authority must take countermeasures.
It is about "more sustainable house prices" to achieve, so Treasury Secretary Grant Robertson.
The New Zealand reform shows how great the social stress is caused by exorbitantly expensive real estate.
Society after society is coming under pressure - on the other side of the globe, in New Zealand, as well as here in Europe.
Where houses and apartments rise sharply in price, social peace is in danger.
The middle classes are plagued by fears of relegation.
As homeowners get rich, many citizens no longer have a chance to buy their own home.
It is understandable that politicians are concerned about real estate prices.
However, whether the central banks should be entrusted with providing affordable housing is another question.
To the author
Photo:
Institute for Journalism, TU Dortmund
Henrik Müller
is professor for economic journalism at the Technical University of Dortmund.
Before that, the graduate economist worked as deputy editor-in-chief of manager magazin.
In addition, Müller is the author of numerous books on economic and monetary policy topics.
Every week he gives a pointed outlook on the most important economic events of the week for SPIEGEL.
In New Zealand, the government's move follows a real estate boom that has been virtually uninterrupted since 2000.
In the past five years alone, prices have risen by 36 percent.
Politics is resisting the upward trend.
In 2018, Parliament banned foreigners from buying New Zealand real estate.
It was of little use.
Now the central bank in Wellington is making it harder to grant loans for property purchases.
Because interest rates are close to zero at the other end of the world and the central bank is buying up bonds on a large scale, it is relying on regulatory interventions, such as stricter risk provisioning rules for banks.
If that doesn't help either, the Reserve Bank may have to raise interest rates at some point.
Can New Zealand's approach become a model internationally?
The Council of the European Central Bank (ECB) meets on
Thursday
.
There is actually plenty to do in the eurozone as well.
The markets are also tense in the quarters of major European cities.
But real estate inflation was not an issue at the January Governing Council meeting, as the minutes show.
Living space is becoming more and more expensive, despite Corona
Germany's real estate boom has been going on for a decade.
The Bundesbank has calculated that prices in German cities have more than doubled since 2010.
The trend has long since arrived in more rural areas too.
In the past five years alone, prices in this country have risen by an average of 40 percent.
The gains were even stronger elsewhere, including the Netherlands, Portugal, Slovakia, Latvia and Lithuania.
The average price increase in the euro zone over the past five years has been 25 percent.
In fact, there are hardly any countries where houses and apartments have not become more expensive.
(One of the very few exceptions is permanent Italy.)
more on the subject
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The development has recently accelerated again, despite Corona uncertainty.
Interest rates are still low.
Real estate financing is still available for around 1.35 percent on average in the Eurozone.
In the financial markets, many have long been betting on rising inflation rates - and that means rising interest rates.
It is possible that the run on real estate will accelerate further because investors want to secure favorable financing conditions quickly.
The long real estate boom could pick up speed again - and then burst as a big bubble.
"Harder, better, faster, stronger" - really?
These are extraordinary times.
The money supply in the euro area is currently growing by more than ten percent annually.
Behind this are corona special effects, in particular the massively expanded bond purchases by the ECB.
And yet: when the money supply rose as strongly as it does now, the crash of 2008 followed shortly thereafter. In many euro countries, property prices plummeted in the years that followed.
Are we facing the next crash?
Many investors consider the mega-stimulus in the USA in particular to be too great.
The euro countries are also bravely pumping money into the economy, while the central banks around the world continue to depress the accelerator.
Because the risk of inflation increases, interest rates on the financial markets also rise.
But the response of the central banks to this scenario is unusual.
Instead of gradually tightening monetary policy in order to contain emerging inflation fears, they are becoming even more expansionary.
The Australian central bank recently responded to rising capital market rates with expanded bond purchases.
The ECB is also intervening to reduce long-term interest rates.
The imperative of the hour reminds him of a daft punk song, said ECB board member Fabio Panetta recently: "Harder, better, faster, stronger" - only if the central banks
really
worked
hard
could the economic outlook after the corona crisis
improve
and
achieve
a
stronger
upswing
faster
.
Sounds determined, but there is a logic behind it that must seem quite alien to traditional central bankers: if inflation sets in but the ECB manages to keep long-term interest rates low,
real
interest rates
will fall
even further.
And that would push the upswing even more, says Panetta.
The argument in favor of such a strategy is: The Corona recession is so severe that an unprecedented program is required to polish away the scratches of the crisis.
Two scenarios: boom or crash?
The central bankers are taking a high risk bet.
The operation can work - but it can also fail.
Both would have massive effects on the real estate markets.
Here are two scenarios:
If things go well, the real estate boom could continue for years.
In an optimistic scenario, the eurozone economy will reach its pre-crisis level sometime in the coming year.
Thereafter, a positive dynamic of growth, investments and largely stable consumer prices could set in - with interest rates remaining low.
Ideal conditions from the point of view of real estate investors.
The Frankfurt central bankers would then be confronted with similar questions as their colleagues in New Zealand today.
You might have to intervene with tougher regulatory measures to curb further price exaggerations.
But it can also turn out quite differently.
It is possible that the unrest among investors in view of the looming dangers of inflation will be so great that the central banks will not be able to stop a rapid rise in capital market rates.
The financing conditions would soon worsen.
A slide in property prices would be the likely consequence.
Especially since the demographic prospects are becoming gloomy: the population as a whole is hardly growing any more, and especially the densely populated, expensive cities no longer appear as attractive as they used to be in times of chronic pandemic threat.
The potential for setbacks is enormous.
In the seven largest German cities, residential properties are overvalued by more than 35 percent, estimates the Bundesbank.
And the “marked price exaggerations on the urban housing markets” would have increased “during the corona virus pandemic”.
Difficult conflicts
The question that remains is whether central banks should aim to stabilize house prices, as is now the case in New Zealand.
The answer is not that simple.
For there are conceivable situations in which the central bank is forced to raise interest rates in order to get a grip on house price inflation - and in return provokes a recession.
Central banks that are supposed to pursue several goals on an equal footing run into difficult conflicts.
But at least they should keep an eye on the side effects of their policy - and if necessary take countermeasures at an early stage.
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The main economic events of the week ahead
Monday Up Arrow Down Arrow
Amsterdam -
A new auto giant is forming
-
Stellantis
, the newly merged group of PSA and FiatChrysler, invites you to the extraordinary general meeting.
Tuesday Up Arrow Down Arrow
Luxembourg -
How are you, Europe?
- The EU statistics agency Eurostat publishes details on economic development in the last quarter of 2020.
Paris -
World Economy
- The OECD presents its current outlook on further economic development.
Wiesbaden - German
industrial economy
- The Federal Statistical Office publishes new export figures.
Reporting season I
- business figures from Deutsche Post, Continental, Symrise.
Wednesday Up Arrow Down Arrow
Beijing -
Far Eastern Inflation
- China's Bureau of Statistics reports consumer price trends in February.
Reporting season II
- business figures from Adidas, Traton, LEG Immobilien, Inditex, Pirelli, Lego.
Thursday Up Arrow Down Arrow
Frankfurt -
What next, Mme Lagarde?
- Meeting of the Governing Council with decisions on the further course.
Then ECB President Christine Lagarde will face the press.
Washington -
US Economy
- New numbers on initial jobless claims.
Reporting season III
- business figures from K + S, Hugo Boss, Hannover Re, Stada, Lanxess, Generali, De Longhi, Rolls-Royce.
Friday Up Arrow Down Arrow
Reporting season IV
- business figures from RTL Group, EssilorLuxottica.