Last week brought some news which caught my eye. On Thursday, Bloomberg told us this:
Germany’s housing boom is over as prices for residential properties dropped for the first time in over a decade.
For newer readers the significance of this is that central banking policy has been driven in the credit crunch era by house prices. Or, more specifically, they want house prices higher so they can claim wealth effects for them. In the euro area they are aided by the fact that the official inflation measure, or HICP, ignores owner-occupied housing entirely. So in theory any house price rise is officially pure gravy, as it is a real increase or wealth effect. Of course, in the real word things are different because first-time buyers face inflation, for example. But the credit crunch has taught us that central banks are not very good at telling the difference between theory and inflation. Otherwise we would not be where we are.
What were the numbers?
Bloomberg told us this:
A measure of home valuations fell in December by 0.8% from the same month a year ago, according to data released by the mortgage technology provider Europace AG on Thursday. That’s the first decline in the company’s EPX index for the month since 2009.
Their chart shows that post credit crunch house price growth was of the order of 5% per annum. Then the advent of negative interest rates and mass QE saw it rise to more like 10% and 2021 saw it push towards 15%.
What is causing this?
The drop in housing prices highlights how much the situation in the German real estate market has changed since the European Central Bank started last year to reverse a decade of low and even negative interest rates. The move has doubled or even tripled the cost of mortgages, pricing many consumers out of the once red-hot market for homes. ( Bloomberg)
That is interesting because as the ECB only raised interest rates in July we have apparently a very fast reaction function. What that fails to take account of is the fact that mortgage rates were already rising due to what was happening in the rest of the world influencing German bond yields and hence mortgage rates. The ECB has a composite mortgage rate measure which was 1.31% in December 2021, but by July 2022 it had already risen to 2.82% so more than double. So as Nelly reminded us:
It’s gettin’ hot in here (So hot)
