Germans fret Draghi rate cuts are fuelling a housing price bubble

Bloomberg

Anna Pesch had long assumed she’d be a renter for years to come, but this month she’s buying a three-bedroom house near the German city of Cologne. She’s got Mario Draghi to thank for that.
“We didn’t want our money to keep going into rent,” said Pesch, a 32-year-old speech therapist who started looking for a home two years ago, around the time European Central Bank chief Draghi dropped the benchmark deposit rate below zero. “We prefer to invest,” Pesch said, “especially since prices in our area just keep going up.”
With record-low costs for mortgages and savings accounts earning almost nothing, Germany is warming to real estate investing. For decades, Germans showed a strong preference for living in rented apartments and stowing cash in the bank, but that tradition is fraying as the ECB keeps interest rates near zero. In the past five years, housing costs in Berlin, Hamburg and Munich have jumped by more than 30 percent, prompting official hand-wringing over rising prices.
In March, Bundesbank board member Andreas Dombret said he sees “clouds gathering on the horizon” and that the central bank is keeping a close eye on mortgages. Finance Minister Wolfgang Schaeuble, who has been critical of the ECB’s policy of goosing growth with cheap cash, in December said the hunt for yield could lead to the “formation of bubbles and excessive asset values.” And German regulators have called for new rules to prevent “credit-driven overheating” in the real estate market.
With employment and wages rising, home prices in Germany started climbing in 2005 after a decade of stagnation. The wealth gains coincided with a demographic shift as Germans abandoned the countryside for revitalized cities such as Berlin and Frankfurt, pushing vacancies in those places near all-time lows.
New mortgages jumped by 22 percent in 2015 after five years of rising at 3 percent or less, according to the Bundesbank.
Developers have been slow to meet the demand. Building permits are at a 15-year high, but they remain about 13 percent shy of the 350,000 new homes the government says are needed annually. In the past year, refugees from the Middle East and Africa have further strained the housing market.
For the first time in recent memory, housing inflation is being driven by low rates and a lack of supply rather than values catching up with rising wages.
Thanks to the ECB, financing costs on a two-bedroom apartment in Frankfurt are lower than they were five years ago, even after accounting for the growth in prices, according to Moebert. If the pace of price increases picks up, “we could start to see risks to the financial system” as banks make loans based on unrealistic valuations.