By Francesco Canepa

FRANKFURT / Reuters – Global home prices rose from Luxembourg to New Zealand due to pandemic stimulation and a shift in work to be done at home. The result has been a multi-year boom fueled by historically low interest rates.

Authorities from Auckland to Stockholm are able to pull the monetary and regulatory levers necessary to control property prices. However, because the euro area is fragmented into 19 markets within the country, it means that the European Central Bank has no options.

The International Monetary Fund reports that five out of 10 countries experiencing the largest increase in property prices worldwide in 2020 came from the euro area.

This raises concerns about the ECB regarding a new housing boom that could create economic and financial havoc, just as the memory of the 2008 crash begins to fade.

The ECB is not allowed to raise interest rates too rapidly or too far to aid some Euro zone member countries. This would hammer most heavily indebted members, including Greece and Italy, while the central banking wants to avoid another credit crisis.

It must instead rely on sometimes reluctant governments to cool down property markets using so-called macro-prudential instruments, which have the advantage of targeting real estate rather than the entire economy.

The measures include making banks borrow more capital to make home loans, and setting up unpopular limits on how large mortgages can be based on income.

“Especially in the euro zone, with one rate for different countries, macro-prudential tools are much better suited to fighting housing bubbles,” said Grégory Claeys, a senior fellow at the Bruegel think-tank.

The issue is that the ECB has no ability to apply these brakes. It can only send warnings or recommendations through the European Systemic Risk Board, the European Union’s watchdog for financial stability.

The ERSB, which is based within the ECB and led by Christine Lagarde, urged Germany to limit mortgages and increase capital requirements for banks in the most recent such action.

These prescriptions, however, aren’t binding. For example, Germany’s finance minister resisted the suggestion to establish a loan/to-value ratio in favor of homebuyers.

Euro zone house prices are booming – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwambdvo/Pasted%20image%201645601339690.png

SUCCESS?

The history has shown that this kind of regulation works.

South Korean authorities managed to reduce house price growth in 2000 by setting a debt/income ratio.

Sweden did manage to reduce the price of a home in 2018, but only by requiring homeowners to repay at least 1 percent of any outstanding loan each year for mortgages exceeding 4.5x their household income.

Matthias Holzhey co-authors UBS’s Global Real Estate Bubble Index. He said, “That would make a huge impact very quickly.”

However, it will require certain unpopular options such as making mortgages impossible to afford for the poor.

It is this reason that national regulators within the euro zone, often including government officials who could be subject to backlash electorally, are dragging their feet.

Germany has announced its plans for easing the pace of the housing market, just a decade following the boom. Germany’s house prices were already 25%-35% above the inflation rate according to the Bundesbank.

Joerg Kraemer, chief economist at Commerzbank (DE) said that “when you implement strict macroprudential steps, you disrupt the party.” It requires an independent position.

Despite its recommendations to the contrary, the ESRB reported this month that Finland was not taking enough steps to stop mortgage lending in both Finland and Netherlands.

“There’s no cost for a politician for not acting,” said Bruegel’s Claeys. “We need an independent, financial stability council that can take a bite.”

Mortgage lending is booming – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnxmlkpr/Mortgage%20lending%20is%20booming.png

DOUBT

However, research has shown that monetary policies still matter and can be used to make macro-prudential regulatory more efficient if it supports them or it can override if it is working in the other direction.

It could also be true for the euro area, according to economists. However, they doubt that regulation will significantly impact the market as long mortgage rates stay below inflation. Property investments are attractive both for professional investors and households.

According to the most recent ECB data, borrowers locked in a monthly mortgage interest rate at 1.3% over 10 years as of December. This is compared with an anticipated inflation rate just below 2% for that time.

Kraemer from Commerzbank is just one economist who believes that these negative real returns will continue, thereby minimizing the impact of regulation curbs.

“When rates are too low it’s an uphill struggle,” he said.

Ireland is an example.

There was a 14.4% increase in home prices despite the 2015 tough restrictions that set mortgage limits at 3.5 times gross annual income.

ECB policymakers have suggested that central banks should consider giving more weight to the house price when estimating inflation and setting interest rate.

Mortgage rates have never been so low – https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoegdlpr/Mortgage%20rates%20have%20never%20been%20so%20low.png