Shock news in the Bundesbank’s latest monthly bulletin: German house prices have gone up. The more-or-less flat profile of residential property prices over the past decade has been one of the defining features of Europe’s largest economy over the past year. It meant the country escaped a house price bubble, the downside of which is now being seen in the US, UK and, within the eurozone, in Spain and Portugal. (Instead German investors piled into US subprime mortgages – but that’s another story.)
Rising inflation expectations, and ‘steeply’ increasing house prices have encouraged the Bank of Israel to raise its policy rate, continuing a programme of rate normalisation. October’s interest rate – not shown on the chart as we are still in September – will be 2 per cent.
Inflation expectations calculated from the capital market for one year ahead and those of the private forecasters remain in the area of the upper limit of the target inflation range, with the interest rate expected to rise to about 2.7 percent in a year’s time.
Low interest rates are also encouraging housing loans:
House prices have never featured as a dinner party topic in the eurozone in the way they have in the UK or US. But there is real news today – the first annual fall in prices recorded since 1982.
The unprecedented drop is revealed in the European Central Bank’s latest monthly bulletin, and throws into reverse years of strong growth since the euro was launched in 1999.
Just one thing might temper the excitement, however. The 2.4 per cent nominal fall refers to house prices in the first half of 2009. Yes, last year. As the ECB goes onto argue later in its bulletin, housing market statistics are woefully lacking in the eurozone. Not only is the data old. There is no harmonised European series. The ECB’s figures are compiled by putting together national indices. (The FT carries out a similar exercise, allowing cross country comparison in house price trends.)
Well done to the Swedes. While the world frets and dithers about house price bubbles, the Swedish central bank has come up with a plan. In less than a year, a new commission will report back on all you could wish to know about Swedish housing bubbles: what makes them likely; what pops them; what tools are – or should be – available to combat them; and whether Swedes are currently in one.
The report will focus on residential property, although the (better studied) commercial property sector will be included. The commission will be run from within the central bank by heads of the monetary policy and financial stability departments. A related conference will be held in the autumn of this year and the final report is expected no later than January 31, 2011.
A Bank of Canada official earlier today sought to dampen concerns that the Canadian housing market be caught in the same type of bubble that threw the US into recession.
In the Bank of Canada’s view, it is premature to talk about a bubble in Canadian housing markets. Recent house price increases do not appear to be out of line with the underlying supply/demand fundamentals. Moreover, with housing starts below long-term demographic requirements, inventories are still declining. It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors – notably the historically low borrowing costs, as well as pent-up and pulled-forward demand – which cannot continue to drive increases in house prices and activity. Thus, we see the housing market as requiring vigilance, but not alarm.
One measure of the “underlying supply/demand fundamentals” of housing is the amount home prices rise relative to rental prices. In normal times they rise at roughly the same rate. In the US, house prices rose over 100 per cent between 2000 and the peak of the housing market in 2007, according to the 20-city Case Shiller index, while rental prices grew just 24 per cent. By contrast, in Canada rental prices rose 11 per cent from 2000 to 2008, while the price of a houses in the Teranet 6-city composite index rose 85 per cent over the same time.