Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fuelling a property boom that is creating a new set of problems.
Money is so cheap – a 20-year mortgage can be had in Paris or Frankfurt, Germany, at a rate of less than 1 per cent – that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe.
In some parts of Europe, said Jorg Kramer, chief economist at Commerzbank in Frankfurt, valuations have already returned to or exceeded levels that preceded the continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.
“The risks are real, because negative interest rates in Europe are cemented,” Mr. Kramer said. “What’s important for the economy as a whole is to prevent the emergence of a dangerous new bubble.”
Demand has surged in the five years since the European Central Bank pushed one of its benchmark interest rates below zero, a step never before tried on such a scale. Prices jumped at least 30 per cent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 per cent in Portugal, Luxembourg, Slovakia and Ireland.
That has made home ownership increasingly unaffordable for almost most anyone except high earners, while also driving up rents, pushing working class people farther from urban centres. A political backlash is unfolding as European mayors intervene in the market with rent controls, higher property taxes and subsidized housing programs.
“It plays into a sense of social distress,” said Loic Bonneval, a sociologist at the Max Weber Centre in Lyon, a social research organization.
While low rates helped produce a rebound in the euro zone, economists say the policies now appear to be doing more harm than good, clouding the bank’s efforts to reverse inequality. They have not resolved fundamental problems like weak business investment. Nor have they revived inflation – which helps lift wages – anywhere but in the housing market.
“The dynamics have totally changed in a short period of time,” said Matthias Holzhey, the head of Swiss real estate at UBS and the lead author of an annual report on property price spikes in major global cities. In some parts of Europe, he said, “low rates are pushing real estate valuations into the bubble risk zone.”
Financial authorities are on alert. In September, the European Systemic Risk Board, an arm of the European Central Bank that helps regulate Europe’s financial system, called on 11 countries including Luxembourg, Austria, Denmark and Sweden to pursue regulations and tax measures meant to rein in prices and promote housing affordability and availability.
The Bundesbank, Germany’s central bank, said recently that real estate in German cities had been overvalued by 15 per cent to 30 per cent – in other words, that there is a bubble. The UBS survey cited Munich, Frankfurt, Amsterdam and Paris as cities at risk. And a study by the global accounting firm Deloitte & Touche cautioned that average house prices “will exceed precrisis levels” if the European Central Bank keeps interest rates at zero, as planned.
Housing prices have risen sharply in the United States as well. But there, the boom has been driven by individual buyers, household debt has been held in check and lending standards have remained relatively tight – all factors that reduce the chance of another collapse. Moreover, while benchmark interest rates in the United States have been kept low, they were never negative – and have now been above zero for several years.
Some economists say that the concerns in Europe are overblown and that prices are overvalued but not in a danger zone. For one thing, job creation from the economic recovery, however tepid or uneven, has expanded the ranks of creditworthy borrowers. And buyers are mainly living in properties or renting them out, rather than flipping them as happened before the crisis.
The supply of urban housing, however, has failed to keep pace with the resulting demand. Disrupters like Airbnb have added to the crunch by converting residential properties into vacation stays. The result is a shortage of affordable housing, particularly in the rental sector, squeezing middle and low-income earners such as teachers, firefighters, nurses and retail employees who work in cities but cannot afford to live in them.
The dynamics are worsening as deep-pocketed domestic and foreign investors pivot from focusing almost exclusively on commercial real estate to acquiring residential housing around Europe. Pension and insurance funds, which typically invest in government bonds, have found it impossible to make money off countries like Germany, where the interest rate paid is less than zero. That has driven them into real estate funds, which offer high returns in comparison to bonds.
Rents and mortgages consume a quarter of monthly income on average, up from 17 per cent two decades ago, according to data compiled by Housing Europe, a federation of affordable-housing groups. One-tenth of Europeans spend over 40 per cent of their income on housing. The rates are sharply higher for the poorest households.
“House prices have risen much faster than citizens’ incomes,” said Cedric Van Styvendael, the organization’s president. “It’s a problem for Europe.” Wages and salaries in the euro zone grew 2.7 per cent in the three months to June in 2019 compared with a year earlier.
The scarcity of affordable housing is fuelling resentment and political strife. In Madrid and Barcelona, home prices have jumped more than 30 per cent since 2016, pushing rents up as landlords sought bigger returns. Prime Minister Pedro Sánchez capped rents in Spain this summer at the rate of inflation, now 0.4 per cent, limiting income for property owners.
In Paris, where 70 per cent of residents are renters, Mayor Anne Hidalgo imposed new rent controls. While rents are limited by strict housing regulations, they have risen 40 per cent between 2000 and 2018. As property prices keep climbing – they recently broke a record of 10,000 euros ($14,570) on average per square metre, or about $1,315 per square foot, one of the highest prices in Europe – Ms. Hidalgo is taking other steps to prevent the city from becoming a “ghetto for the rich.” Her plans include building subsidized housing that families with modest incomes can purchase at half the market rate.
Few places have felt the impact as sharply as Berlin. Since the fall of the Berlin Wall 30 years ago, workers, artists and students have increasingly been displaced by an influx of young professionals with families. But property prices and rents have skyrocketed in recent years as home buyers and investors double down.
The city imposed a five-year rent freeze, the toughest in Europe, in the summer after rents jumped more than 50 per cent in five years, and gave tenants the right to demand reductions if rents go too high. German real estate stocks have slumped since the ruling.
For Kathrin Hauer, 39, the measures are urgent. She was a student nearly two decades ago when she became a tenant in a World War II-era building formerly owned by the East German government, on Schoenhauser Allee, a central street. Ms. Hauer, who works as a costume and set designer for German theatres, was long happy with the monthly rent of less than $600 for her apartment, which was bought by a small group of investors after communism.
Then in 2016, the building was sold to an investment company. Last December, right before a national law limiting rent increases was to take effect, the company announced major construction work that would raise rents on the low-income tenants by 250 per cent. Ms. Hauer’s rent would surge to almost $2,000 a month, far more than she could afford.
“This is meant to scare us to get out,” Ms. Hauer said.
The tenants won an order from the city’s planning department to halt the renovations, which included large elevators, balconies and floor-to-ceiling windows. Soon after, in a move that tenants believe was a form of retaliation, Ms. Hauer said, the investors ordered all the trees in the interior courtyard to be razed, and hired a middleman to persuade tenants to agree to the renovations and accept buyouts.
Itai Amir, the director of the company that now owns the building, would not comment for this article.
Wibke Werner, the deputy director of Berliner Mieterverein, an association of Berlin renters with more 170,000 members, said that because of the low interest rates, investors were “betting on concrete gold.”
“These investments are designed to optimize returns,” she said, “which means rising rents and the crowding out of low-income households.”
In Denmark, which is not part of the euro zone but closely tracks ECB monetary policy, benchmark interest rates have been negative for seven years. Seeking greater returns, some Danish pension funds are buying large holdings of prime real estate and new buildings to offer for rent. But rents have grown so high that the city is considering capping them, which could cut into those investments.
At the same time, rates are so low that bargains being offered by banks are hard to pass up. In August, Jyske Bank of Denmark began offering 10-year fixed-rate mortgages at negative 0.5 per cent interest before fees, meaning the amount outstanding on the loan will be reduced each month by more than the borrower has paid. Nordea Bank is offering 20-year loans at zero interest.
While banks have stopped flooding mailboxes with credit card offers, a common practice before the debt crisis, offering ultracheap mortgage loans is a way of luring new customers.
That has tempted borrowers in the Netherlands to go to extremes. While Dutch banks took steps to curb lending this year, Dutch households held mortgage debt of 527-billion euros ($768-billion) at the end of March – equal to nearly two-thirds of the Dutch economy.
The Dutch central bank warned recently that “systemic risk” in the Dutch housing market posed the biggest threat to financial stability. A sudden fall in housing prices could be disastrous for households and banks, it said, because borrowers are overextended.
With little room to manoeuvre, the European Central Bank recently called on politicians in euro countries to take bolder steps to prevent asset bubbles from growing.
“This is all new territory,” Mr. Holzhey of UBS said. “Some caution is warranted because in the past, no one really forecast a house price crash,” he said.
“Headlines always said prices are rising, but there’s no bubble,” he added.
Until there was.