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QE feeding Europe house price bubble, says study



Kate Allen


The European Central Bank’s quantitative easing programme risks fuelling house price bubbles in several countries, according to new research, as investors pour cash into real estate.

Germany, Norway and the UK are judged most at risk because ultra-low interest rates and bond yields have fuelled rapid house price growth, said the report by Moody’s Analytics.

Anna Zabrodzka, the author, said rising prices and the ECB’s €60bn-a-month asset-buying programme have caused “the risk of house price bubbles” to “resurface”.

“While bond markets have experienced a correction and yields on German sovereign debt climbed recently, they are still extraordinarily low,” she said. “This has encouraged investment in the property market, which yields a higher return.”

Since 2010 average house prices in Norway have risen more than 30 per cent, in Germany by nearly 25 per cent and in the UK by nearly 15 per cent, Moody’s Analytics found.

The rises are buoyed by rapid growth in big cities such as London, Oslo and Munich, where properties are “becoming increasingly overvalued”, it added.

Lucian Cook, director of residential research at Savills, property advisers, said that “cash has become a much greater driver of house prices” across Europe in recent years due to low interest rates and weak returns on other asset classes.

The search for yield has also pushed a surge of money into the commercial property market over the past couple of years, sparking fears of a separate bubble. In 2014 global commercial property prices and yields hit levels last seen before the financial crisis, research published This year showed.

The Bundesbank warned in late 2013 that average German house prices could be overvalued by as much as 10 per cent, and by 20 per cent in some big cities. Moody’s Analytics said this was “also evident in London and Oslo”.

The greatest risk of a bubble lies in Norway, the researchers said. Concern has been mounting there for some time. In 2012, the IMF lowered the country’s growth forecast, blaming rapid house price growth.

Norway’s Financial Supervisory Authority said this year that falling interest rates were pushing the housing market into an upward spiral. Despite this the Norwegian central bank has continued to cut interest rates in an effort to prop up the economy in the face of low oil prices.

Germany’s housing market has long had a reputation for being stable, with little if any price growth. Unlike most other big European economies it avoided a housing market slump after the global financial crisis.

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But since 2009 prices there have been rising steadily due to Germany’s reputation as an economic haven.

“Growing demand for German properties is leading to overvaluation, especially given the insufficient supply,” Moody’s Analytics reported. Construction has now begun to pick up but “it will take a few years before supply catches up to demand”.

Although the Bank of England has halted its own quantitative easing programme, British house prices are still growing strongly. They rose by 5.7 per cent in the year to May.

This growth rate has slowed somewhat — in the same period the previous year prices rose by 10.4 per cent.

Last year the Bank of England introduced tougher mortgage lending rules, and warned that a resurgence in the country’s pre-credit crunch house price boom risked derailing Britain’s economic recovery.

But Moody’s Analytics said that loan standards in Britain are “still relatively loose”, primarily because of the government’s Help to Buy scheme, which subsidises purchases. In particular, the number of mortgages with high loan-to-value ratios has risen sharply since the programme was introduced in 2013.

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