Central bankers in a raft of countries are worrying out loud about overly frothy real estate prices, warning that they may have to intervene – and in some cases, have already started – to take the air out of fast-rising urban markets. Yet the leading causes are their own historically loose monetary policies and government incentives designed to boost home purchases, as well as plummeting international faith in other, low-yielding asset classes. You would think that central bankers would know that if you keep interest rates too low for too long, a housing bubble inevitably follows.
In Germany, the Bundesbank has warned about rising prices that are "difficult to justify based on fundamental factors," like demographics or economic expansion. The central bank observed that apartment prices in key urban centres have jumped by more than 25 per cent in the past three years – and a whopping 80 per cent in Berlin – which could spark "fears of a broad-based property price boom."
Germany, which has relatively low levels of home ownership and mortgage lending, avoided the property bubble and bust of the mid-2000s that led to the global financial collapse and the Great Recession. But now, at a time when supply remains little changed, demand is rising sharply. The reasons are obvious: record low rates and a surge of international money scouring the world in search of safety and growth. Similar factors are at work elsewhere.
From London, Berlin and Oslo to Shanghai, Hong Kong, Singapore and even Auckland, N.Z., hot money is snapping up condos and houses at a remarkable clip, taking the already unaffordable off the scale and leading one commentator to label London real estate as the "new global reserve currency." Observers who insist Canadian real estate is already in bubble land ought to take some of those other markets for a test drive.
In China, concerted government efforts to take the air out of the bubble have largely been ineffective, as witnessed by the 9.1 per cent rise in new home prices, the biggest jump in three years. In the largest cities, the increases were in the double digits.
In Britain, which is still digging its way out of recession, average prices climbed the most in three years, as mortgage lending reached levels not seen in five years. But there was Jon Cunliffe, newly appointed deputy governor of the Bank of England, telling a parliamentary committee not to worry that the government's popular Help to Buy mortgage loan scheme might inflate a bubble.
And if Mr. Cunliffe turns out to be wrong? Well, the central bank has the tools to deal with that, he insists. By which he undoubtedly means tighter monetary policy.
No central banker ever acknowledges that a property bubble exists. It must be the second item in the central bankers' handbook, right after never admitting to a mistake in policy or judgment. But five years of rock-bottom rates and a host of favourable tax policies and other incentives have turned the impossible into the inevitable. Sooner rather than later, investors will once again face the painful fact that housing prices, even in supply-constrained major markets, can and do fall. And the cycle of recovery will begin anew.