Negative interest rates and high rates of household debt in Europe may be leading to a housing bubble.
The European Central Bank five years ago slashed its benchmark interest rate to below zero in an effort to ramp up the continent’s stagnant economy. But the move kickstarted a surge in demand to buy housing, the New York Times reported.
“The dynamics have totally changed in a short period of time,” Matthias Holzhey, UBS’ head of Swiss real estate told the Times. And in some pockets of Europe in the low rates are forcing real estate valuations “into the bubble risk zone,” he added.
A UBS survey led by Holzhey found that Munich, Amsterdam and Paris are among the cities at risk of a bubble. And Germany’s central bank found recently that real estate in the country’s cities is overvalued by 15 to 30 percent, according to the Times.
In response, ECB’s European Systemic Risk Board is asking 11 countries to bring in prices and focus on housing affordability through regulations and tax policies, the Times reported. Those countries include Denmark, Sweden and Austria. In Spain, rents have been capped at the rate of inflation, while the mayor of Paris plans to enact rent controls and build subsidized housing.
After Europe’s economic recovery, job growth made it possible for more people to borrow credit and buy homes — and most aren’t flipping those properties as they were before the crisis, according to the Times. Housing prices are up 40 percent in metropolitan areas of Portugal, Luxembourg, Slovakia and Ireland over the last five years.
Much of the rise in housing costs can be directly attributed to foreign investors and institutional players — especially pension and insurance funds— pouring money into European real estate, chasing returns.
It’s easy with rates at zero percent. In August, Jyske Bank of Denmark began offering 10-year fixed-rate mortgages at negative 0.5 percent interest before fees, while Nordea Bank is offering 20-year loans at zero interest. Such policies are luring new customers, but economists argue there are too many of them. And those borrowers are often overextended.
In the Netherlands, the collective household mortgage debt as of March was $584 billion, nearly two-thirds of the Dutch economy. Its central bank recently warned that the housing market is the biggest “systemic risk” to the stability of the economy. If housing prices fall, banks and homeowners will quickly be under water and it will be a disaster, the bank said. [NYT] — Mary Diduch