Negative interest-rates and QE have created a house price boom in Germany

A feature of these times is that is called easy monetary policy and this is particularly true in the Euro area. There the European Central Bank has a deposit rate of -0.4% and is undertaking asset or bond purchases of 60 billion Euros a month as well. This means that as of last week over 1.8 trillion Euros of bonds have been bought including some 216 billion Euros of covered bonds which support banks and then mortgage lending. Last week we discovered that some countries “have been more equal than others” in terms of where this 1.8 trillion Euros has ended up. From the ECB.

Excess liquidity has been persistently concentrated within a group of banks located in a limited number of higher-rated countries, i.e. around 80-90 % of excess liquidity is being held in Germany, France, the Netherlands, Finland and Luxembourg (see Chart 1) and even their country shares have been fairly stable across time.

It is fascinating that a country geographically as small as Luxembourg merits a mention. But Reuters updates us on the two main beneficiaries.

The study shows that 60 percent of the money spent by the ECB and national central banks on buying bonds ends up in Germany, where sellers, mainly UK banks, have their accounts. France accounts for a further 20 percent.

Okay and the consequence of this is?

But the fact that the money keeps accumulating in the bloc’s richest countries rather than flowing where it is needed the most risks undoing some of the ECB’s efforts and shows the European Union’s objective to create a banking union is still far from reached.

This makes me wonder about asset prices in the main beneficiary Germany as after all these QE ( Quantitative Easing) policies are claimed to have “wealth effects”.

House Prices in Germany

Let us step into the TARDIS of Dr.Who and go back to February of 2014 when the Financial Times reported this.

House prices in Germany’s biggest cities are overvalued as much as 25 per cent, the Bundesbank warned on Monday, adding to fears that international investment has helped to fuel a property bubble in the eurozone’s largest economy. The German central bank said that residential real estate prices in 125 cities rose by 6.25 per cent on average last year. In October, it reported that property prices in the biggest German cities were 20 per cent overvalued, suggesting the problem is getting worse.

If we move forwards to March 2016 then this from Bloomberg is eye-catching.

German house prices went nowhere for years. Recently they’ve grown faster than the UK.

So what had they done?

House prices have increased 5.6 percent a year over the past five years, according to UBS, which is double the average annual rate of increase since 1970.

As we see in so many other places the rises were concentrated in the major urban areas.

Prices are rising particularly fast in urban areas, where young people increasingly want to live. A gauge of advertised apartment prices in seven major cities including Frankfurt and Berlin rose 14.5 percent in 2015, the most since 2000, according to Empirica, a research institute.

As to “wealth effects” there was something else which is somewhat familiar to say the least.

So far the biggest beneficiaries have been Germany’s listed residential landlords. Cheap debt has enabled them to snap up housing portfolios and smaller rivals, thereby achieving cost savings through scale

What about now?

The Bundesbank calculates its own house price index which covers 127 cities and it rose by 8.3% in 2016 following 7.6% in 2015 and 5.7% in 2014. So according to its own index then prices must be very overvalued now if they were already overvalued back in 2014. Putting it another way the index which was set at 100 in 2011 was at 141.4 at the end of 2016. So quite a rise especially for a nation which has little experience of this as for example the period from 2004 to 2007 which saw such booms in the UK,Spain and Ireland saw no change in house prices in Germany.

In January my old employer Deutsche Bank looked forwards and told us this.

In 2017, we therefore expect rents and property prices in the major German cities, and across the country as a whole, to rise substantially once again…….Munich remains the most dynamic German city when it comes to property, with its fast-rising population and historically low vacancy rate likely to lead to further price increases for many years to come.

There is an element of cheerleading here which of course is a moral hazard issue for banks reporting on property prices which will not be shared by first time buyers in Germany. Those in Berlin will have particular food for thought.

Property prices in Berlin are now twice as high as they were in 2005 and have reached the level of some of the major cities in western Germany.

As of the latest news Europace have constructed an hedonic (quality adjusted) index which rose by 7.6% in the year to March.

What about rents?

These have risen but not by much if the official data is any guide. The rent section of the official Euro area CPI measure rose at an annual rate of 1.6% in March. Although Frankfurt seems to be something of an exception as Bloomberg reports.

The monthly cost of a mid-range two-bedroom apartment in Germany’s financial capital rose 20 percent in 2017 from a year earlier, while the cost of an equivalent living space in London fell by 8 percent, according to a Deutsche Bank study.

Frankfurt rent rises will of course be particularly painful for Deutsche Bank employees.


There is a fair bit to consider here but what is unarguable is that the easy monetary policy of the ECB has been associated with house price rises. These are noticeable in international terms but are particularly noticeable in a country which escaped any pre credit crunch boom. Also if we use the Bundesbank data above house prices rose by 41.4% in the period 2011-16 whereas real wages only rose by 6.6% ( Destatis) which is quite a gap! I think we know how first- time buyers must feel and yes there is a fair number as whilst Germany has fewer owner occupiers in proportionate terms than the UK they still comprise 51.9% of the housing market.

It is hard to avoid the thought that this house price boom is what central bankers would call a “wealth effect” from their policies, especially if we note that the liquidity seems to have mostly headed to Germany. Of course some of that will be the equivalent of a company name plate on the door but some will be genuine. Meanwhile as we note wealth transfers and inflation there is of course the near record high bond prices and the highs in the Dax 30 equity index seen last week.




22 thoughts on “Negative interest-rates and QE have created a house price boom in Germany

  1. What amuses me is that everywhere QE is practised the results are the same. Yet policy makers are constantly astonished that this should happen. I’m sure some sciencey chap had something to say about this once.

    • Did he say blowing a property bubble and getting central banks to bail out failed lending once was remarkable, but for central banks to hand out dirt cheap money forever more is extremely profitable?

      This is what annoys me about the elections in all European nations, there is no debate at all about this central bank QE thieving which destroys the standard of living for 10s if not 100s of millions of workers wages. If Labour had any intelligence they’d be making it the central part of their campaign, especially after Ms May raised it in her 2 day campaign to become leader stating QE/ZIRP is responsible for inequality… but no they offer free parking at hospitals and raising income tax on working people as opposed to taxing assets and lowering income tax for all.

  2. Hello Shaun ,

    I wasn’t aware there was a house price boom …..

    so one has to wonder why or what the end goal is – certainly for the average German. I though they had high prices any way and most rented .

    I do know when I was over there last year they are more in favor of cash than plastic .

    God knows what a couple of million more mouths to house will do …..

    ( please note I do not care who or why or anything else – I merely point out an increase in the population that hasn’t be catered for )


    • I also do not care who or why, but am amazed that people don’t talk more about two numbers:
      1. We have (officially) 3 million EU nationals living in the UK;
      2. We build nearly 150,000 houses a year.
      The two don’t seem to add up.

      • Given you state the house building number on an annual basis but make no chronological qualification on the number of EU nationals living in the UK am I to conclude there are 3 million EU nationals arriving a year? I think not. Or are you deliberately being obscure in order to create FUD? Or perhaps you’re just a racist.

        • ‘Racist’? So are Europeans now a different race? I don’t think so.

          The only people who throw that term around are bigoted progressive lefties who get upset when others don’t agree with their, usually crackpot, ideas.

        • No, I am not. I am merely trying to indicate that, if you allow a lot of extra people into the country (with all sorts of other demographic changes as well), you will either:
          1. Need to build far more houses; or
          2. Have a housing shortage (which then may lead to unaffordability)
          The 3 million figure is the cumulative number (therefore over many years) of EU nationals living here, according to the EU’s own statements about how many of its citizens it wants to protect in the UK. The 150,000 is an annual figure.
          I have to say that, while everyone is free to correct/challenge others’ points of view, this site is characterised by the respect of people posting for others on the site and I would be sad if postings resort to ad hominem abuse, as it will become just like any other website.

      • Ad Hominem! Do I detect the whiff of someone letting me know they have a a classical Oxbridge education here!

        Of course it’s easy to think of a plausible explanation of a clearly racist outburst. It is unfortunate that you did not make the chronological differentiation between the 3 million and the 150000 number oriiginally.
        Had you done that the suspicion of FUD and racism would never have arisen. However, you didn’t and it has.

        As for Andrew the idiot and the 5 other idiots who “like” his abusive comment they clearly don’t understand what racism is, i.e. someone who demonstrates racism towards others based on race or ethnicity, either that or they don’t understand what a “European” is – an ethnic group in Europe.

        He and presumably the other 5 “likes” also “know” that I am a “bigoted progressive leftie” when nothing could be further from the truth! I am against racism – perhaps in his and the other 5 “likes” book that makes me a bigoted leftie – what was that you were saying about ad hominem comments?

        • I forgot to say yesterday that speaking of fallacious arguments we have yours suggesting that 3 million Europeans already here are somehow making the housing problem worse but they are already here so cannot make it worse.

          You also continue to fail to mention over what time period these 3 million have arrived – if over the last 20 years then given the lowish UK birth rate and based on an assumption that each house built would accommodate 3 people the 2 add up easily.

          Do you have any response to this? Or is this just a forum for you to let off steam with no real in depth reasoning behind your words?

      • No reply? As I thought, another barrack room lawyer who goes quiet when confronted with the trite feebleness of his comments!

  3. And that is why interest rates can never be raised again.Decades and decades of financial repression to come.

    And then, when everyone’s savings have either been spent or inflated away to nothing, cash is banned,and there is only mass debt on every individuals account, the “Universal Basic Income” will be introduced as the panacea for everyone. No more middle class, just the mega rich and the dirt poor, all just one weeks pay or benefit allowance from total ruin, very easy to control.
    Welcome to Communism 2.0 everyone.
    But,but,but who could have seen it coming???

    • Currently the grey power vote is strong because this generation turns out reliably for polls. The baby boomer generation had free education and relatively affordable housing, many of them live better than following generations will. As time passes and home ownership ratios fall – > the electoral certainty that falling house prices equal electoral disaster will fail at some point.

      Current English rents/house prices are lunacy. They are unsustainable. I’ll predict a big change within a generation. Britain could learn a lot from German rent controls and tenants unions. They have the assumption that everyone deserves affordable and habitable accomodation. They also have rules to impose obligations on residents, which should prevent antisocial behaviour and/or allow eviction of troublemakers.

    • Mega rich and dirt poor don’t exist in true communism, only in financial systems run by dictators like the old Soviet Union and capitalist societies – banks?

  4. Great blog as always, Shaun.
    I looked at the quarterly owner-occupied housing price indices (OOHPIs) for the EEA countries, which were updated for 2016Q4 last month. Germany doesn’t really stand out from most of the countries in terms of its OOHPI inflation rate. Its annual inflation rate for 2016Q4 was 2.9%, up from 2.6% in 2016Q3. On the other hand, it is much higher than the corresponding German HICP inflation rate, 1.0% in 2016Q4, up from 0.3% in 2016Q3. Of the countries that the ECB mentioned having received the bulk of the excess liquidity, Luxembourg is the one that really stands out, with an annual OOHPI inflation rate of 5.0% in 2016Q4, up from 2.9% in 2016Q3.

    • Hi Andrew and thank you.

      Thanks for the OOHPI data which does at least pose a question for the ECB in the way that the official CPI does not. It would have punctured a lot of the deflation claims and hysteria that went around a year or two ago.

      Actually these numbers remind me that whilst there are of course differences Germany shares with the UK a position where house price rises and rises in rents come from two rather different universes.

  5. The whole thing is perfect for central bankers. They can:
    1. Talk a lot about doing something for the economy
    2. Watch share prices and house prices rise
    3. Be a lot richer personally because of 2
    4. Safely exclude 2 from the inflation figures, so pat on the back for fulfilling their remit.
    The trick is to get out of their jobs before the plates stop spinning.
    By the way, I love the way that a trillion is the new billion. Just imagine if 1.8 trillion euros had been provided for, say, hospitals or schools, rather than buying bonds. Just a thought. Unless I have my noughts in the wrong place, it represents 3-4000 euros of QE per person in the EU.

    • 1.8 trillion / 340 million in Eurozone = 52940 euros per person. but if you divide it by the 10%ers = 52940 euros per person!

    • the median average wage in EU is about EUR 18,100, so 5300 is bad for Bulgaria ( 4900) but Luxemburg can be ok with it 37,800 EUR . figures are annul and for 2016 ( after taxes etc)



      • lies, damn lies and statistics. Officialdom in Bulgaria are paid very poorly in official statistics. However if you look at their cars, houses, electronic gadgets and holiday spending – it appears that they spend much more than they pay tax on.

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