Quantitative easing by the European Central Bank could drive prices even higher in overvalued listing markets in Germany, Norway and the UK, a new analysis suggests.
House prices in these countries have risen quickly over the last year and a half and as a result the risk of house prices bubbles have re-emerged, according to a report from Moody’s Analytics.
It explains that while the International Monetary Fund’s Global Housing Watch shows prices rising, it is case of a two speed market. Some have rebounded quickly after just moderate price declines during the financial crisis, the other group is still recovering from much steeper price drops.
The first group includes Germany, the UK and Norway where house prices have shot up over the last few quarters and where the formation of a housing bubble is a real possibility and QE feeds asset bubbles, the report points out.
Since March every month the EWCB has been buying €60 billion worth of euro-denominated assets issued by euro one governments, agencies, and European institutions and the programme will last at least until September 2016.
This has seen yields on the government debt of countries viewed by investors as safe fall and this in turn has encouraged investment in listing markets which yield higher returns.
In Germany, house prices have been steadily rising since the middle of 2009 as its listing market is viewed as a safe haven investment in an environment of increased uncertainty. Indeed, Germany was one of the few European countries to avoid a housing market slump during the 2008/2009 downturn, thanks to prudent bank lending regulation.
However, the report says that growing demand for German listings is leading to overvaluation, especially given the insufficient supply. Only recently has construction finally picked up. In the first half of this year, German building authorities granted 10% more building permits than in the same period a year earlier. But it will take a few years before supply catches up to demand.
German house prices have therefore been rising more quickly than rents and incomes. Although the price-to-income and price to rent ratios are still relatively low compared with Germany’s long term average, the report says that if this trend persists the housing market could overheat.
While the outright risk of a housing bubble forming in Germany is relatively low, the Bundesbank is monitoring the situation. So far, it has not intervened. However, in the UK the authorities are doing so. Last year the Bank of England in 2014 warned of a possible housing bubble which could derail the country’s recovery and introduced tighter mortgage loan standards designed to reduce the supply of credit, taking some heat out of the housing market.
The UK’s Financial Conduct Authority also introduced stricter underwriting rules for mortgages to ensure that banks assess borrowers’ ability to repay loans after interest rates start to rise. Yet loan standards are still relatively loose, largely the result of the UK government’s Help to Buy house purchase scheme, which enables buyers to put down as little as 5% on listings selling for up to £600,000.
As a result the number of mortgages with high loan to value ratios has spiked since the scheme was introduced, after largely vanishing in the aftermath of the recession. Although the growth of house prices moderated at the beginning of this year, it is still running hot and the moderation is unlikely to last into the next month or so, the report explains. It also points out that the Conservatives’ election win ended the political uncertainty and should unleash pent-up demand for residential listings.
In Norway in 2012 the IMF lowered its growth forecast for Norway because of the high risk of a housing bubble. Early this year, the Norwegian Financial Supervisory Authority announced that falling interest rates are pushing the housing market close to the breaking point.
The report explains that Norway’s economy has boomed since 2012 thanks to a rapid increase in oil prices. This has created substantial wealth but also high household debt, which has soared to a record high 230% of disposable income. The country’s economy ran into trouble last year with the slump in crude oil prices.
Indeed, the central bank was forced to lower the main policy rate from 1.5% in 2014 to 1% in June this year, which further fuels the housing market. In an effort to cool the market, Norway has introduced measures including raising capital requirements and the risk weights that lenders assign their mortgages, and capping loans at 85% of a listing’s value.
The report explains that authorities in Germany, the UK and Norway are monitoring developments in the national housing markets and are responding with policies designed to ease excessive price growth. Even so, house price increases in some regions within these countries have steamed ahead at an alarming rate.
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Source: Property News Spain