I note a story in Austrian daily Kurier today that bears watching. Since the Great Financial Crisis began, Austrian house prices have zoomed at a pace well above the rate of inflation and the rate of rentals. The price action and other anecdotes make this sound suspiciously like a bubble.
What Schwarz has observed in his everyday, Wolfgang Feilmayr from the Technical University of Vienna has put to numbers: While consumer prices rose by 5.7 percent from 2008-2011, prices for condominiums in Vienna climbed by 37 percent since the financial crisis. Only with rents does Feilmayr give the all clear: "Rents are not developing nearly as strong, they are at the level of inflation."
The article goes on to describe a lot of bubblicious phenomena. For example, it notes that entry level homes in Austria have doubled in price.
One thing I always tell people is that property is fungible: rental, hotel, time-share, buy-to-let, owner-occupied, office – these are all reasonably different uses some types of properties can find. What happens during a housing bubble is that rental and hotel type properties are converted for sale. This is an arbitrage that tells you that prices are being gamed by professionals that understand more money can be made from one use or another. When prices tick down, owner-occupied spaces become buy-to-let, depressing rental prices so that property prices must fall even further to converge with rents. In the US, this has not occurred this time because of the massive foreclosure overhang depressing the conversion to buy-to-let. The fact that office space is being converted to housing in Austria and that perfectly liveable spaces are being torn down to make way for new builds tells me that bubble psychology is in the air.
According to the Wall Street Journal, the same is happening in Germany on a lesser scale:
But low interest rates and cheap ECB loans to banks have revived Germany’s long-dormant real-estate market, pushing average property prices up 5% in the past year, twice the rate of inflation. In small towns in Germany, prices aren’t rising much, but in certain desirable neighborhoods in Berlin and some other cities prices recently have shown double-digit growth from a year earlier.
Since the euro zone’s debt crisis erupted, the ECB’s monetary policy has largely been geared toward protecting countries, such as Spain and Italy, on the bloc’s struggling periphery. Germany benefited from record-low interest rates, which propelled business investment, and from the weaker euro that resulted from the ECB’s expansionary policies, which helped German exports. Germany’s economy grew 3% or more annually in the past two years.
The ECB doesn’t see German home prices as its specific problem. Its job is to keep consumer-price inflation at 2% across the 17-member euro bloc. Still, given Germany’s size, an unsustainable rise in property prices could pose a risk to economic and financial stability.
In my view, what’s happened is that the lack of harmonisation in the Euro Zone means that the ECB’s policy rate is always out of alignment for one group of countries, the core or the periphery, making different countries bubble prone at different times. During the housing bubble, it was the periphery that suffered from easy money as the core was in a permanent state of slower growth. Now, things have reversed and countries like Austria, Germany and Finland have overheated property markets. If the euro zone as a whole suffers a worst-case economic outcome, it bears watching how these bubbles play out. I would be concerned most by Austria, then by Finland and last by Germany.
Source: Immobilien: Halbes Land im Kaufrausch – Kurier
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