Last Thursday June 19, German Finance Minister Wolfgang Schaeuble warned about the risks of loose monetary policy for Europe’s largest economy, saying low interest rates were already spawning ‘dangerous’ rises in domestic property prices.
Schaeuble has expressed concerns before that speculative asset bubbles have been forming as a result of excess liquidity, but his comments at a news conference with visiting US Treasury Secretary Jack Lew went beyond his usual line that low rates must correct higher over time.
His comments come two weeks after the European Central Bank (ECB) cut interest rates to record lows to ward off deflation and kick-start growth in sluggish southern European countries.
The ECB’s move sparked criticism from German economists and the media, concerned that the bank’s one-size-fits-all policy carries risks for the steadily growing German economy, even if it hasn’t increased inflation as yet.
“In the long run, the amount of liquidity is too great and the level of interest rates too low,” said Schaeuble.
Germany’s central bank, the Bundesbank warned that the low rate environment risked creating asset price bubbles and Schaeuble has fanned the flames further by saying that the rise in German property prices is reaching ‘dangerous’ levels and need to be taken ‘very seriously’.
Until 2010, German real estate prices were relatively stable over a period of many years. However, when the euro zone debt crisis broke, the attractiveness of German property as a safe haven investment was boosted and foreign buyers were lured into the market, ultimately bringing about price increases in key areas.
During the same time, more Germans were encouraged to put their money into property instead of traditional savings by the climate of historically low unemployment, strong economic growth and rock-bottom interest rates on mortgages.
The Bundesbank issued a caution about property price rises last October saying that properties in some of the nation’s largest cities such as Munich, Hamburg and Berlin were overvalued by up to 20% – a figure that was upped to 25% in February this year.
At 46%, Germany still has one of the lowest home ownership rates in Europe and its savings ratio remains one of the highest at 10%.
Last Wednesday Germany’s financial stability committee, set up to monitor potential problems in the financial system, said it had investigated the housing market and found no evidence of a property bubble.
However the watchdog which includes members of the Bundesbank, finance ministry and financial regulator Bafin did warn that the low interest rate environment was ‘fertile ground’ for the building of financial risks.
Speculation that German property prices are inflating at dangerous levels is tempered by the prospect of the construction sector moving forward dynamically in 2014, driving growth in the nation’s economy and securing the nation’s position at the top of the European economic league tables.