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13 08 2015
The ECB's Monetary Policy Increases Threat of Real Estate Bubble – but Not Everywhere

In a recent reports, the research institute Moody's Analysis has warned that some of Europe's real estate markets could be overheating. Particularly at risk, according to Moody's, are the cities London, Oslo and Munich, where plots, houses and apartments are increasingly overvalued. Since 2010, property prices have reportedly gone up by 30 percent in Norway and by 15 percent in the United Kingdom, while prices in Germany were said to have gone up by nearly 25 percent.

According to Moody's, the monetary easing policy pursued by the European Central Bank (ECB) has further increased the threat of a real estate bubble. Since spring of this year, the ECB has bought up bonds worth 60 billion euros. This measure – called quantitative easing (QE) – has brought down lending rates in the eurozone and caused investors to opt for real estate investments as alternative. The predictable consequence is rising prices.

No Bubble Looming in Germany

Deutsche Bundesbank, however, took exception to the assumption that a real estate bubble is evolving in Germany. Because despite the sustained low-interest cycle, there has been no material expansion of debt-financed real estate activities so far. Moreover, potential borrowers remain subject to strict requirements in this country. Banks maintain a high level of accountability, and have not relaxed their lending procedures, according to the Bundesbank. In order to keep it that way, the German Supervisory Authority for Financial Services (BaFin) has called on the Federal Government to create minimum standards for loan finance. Additional rights of intervention and minimum requirements for debt-financed residential real estate acquisitions are to be established by 2016. BaFin has requested, for instance, that the equity stake and the minimum payment rate be legally fixed. However, since BaFin sees no specific need for their application at this time, the purpose of these instruments is prevention only.

Construction Should be More Aggressively Promoted

That being said, Moody's noted that the over-valuation of real estate in Germany is caused mainly by elevated demand. Housing construction is lagging far behind demand. Especially the situation in Berlin suggests as much: While Senate of Berlin has called for the construction of 10,000 flats annually, a look at the figures shows that the demographic growth in 2014 alone has generated an extra housing demand of more than 20,000 new flats per year.