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By Jeremy Warner Economics Last updated: October 22nd, 2013 Germany’s property prices are rising Not for the first time, the Bundesbank has voiced concerns about rising German house prices. “What the…!” you might exclaim. Compared to the property price inflation many other countries have seen, Germany’s looks tame indeed. Germans are on the whole makers, not property speculators, with most of them still choosing to rent, rather than own. Even so, prices in major German cities have been rising strongly over the past few years. “After the real estate bubbles in the US and several European house markets burst,” says the Bundesbank in its latest monthly report, “the German property market, which has been quiet for many years, became more attractive to international investors.” Germany is one thing, but the same phenomenon is occurring in major cities more or less everywhere. In London, the property crash of 2009/10 is now but a distant memory. Buoyed by frenzied foreign buying, house and apartment prices are again at record highs, with anything halfway decent going to sealed bids. London property, as one New York Times writer recently observed, is the new “global reserve currency”. Nor is this revival in the UK housing market any longer confined just to London and the Home Counties – it’s fast spreading out to the regions as well. The speed with which both the housing market and the credit cycle are turning has taken the Bank of England’s Financial Policy Committee by surprise; in coming months it must decide what, if anything, to do about it, for this is just the sort of thing the FPC was created for. There may already be some kind of a case for a rise in UK interest rates, such is the strength of the more broadly based economic recovery, but we know from experience that marginally higher interest rates are largely ineffective against a nascent house price bubble. There is, of course, a level of interest rates which would be effective, but only one so high that it would eat seriously into discretionary spending and thereby induce another recession. Mass unemployment seems a high price to pay for taming the housing market. So it falls to the FPC. There are basically two levers under consideration – one is simply to increase the capital banks are required to apply to mortgage lending. Another is to recommend the imposition of strict loan to value lending criteria, though the FPC doesn’t have the powers to impose these off its own back; the Prudential Regulation Authority, which is subject to a higher degree of political interference, would have to do this instead. Given that the Treasury is only just introducing the second phase of its “help to buy” scheme, designed specifically to lower the required deposit, there will, presumably be very little appetite for such measures among ministers, where in any case rising house prices are regarded as an electoral bonus. The FPC thus faces its first big test of independence. All the same, there appears nothing the FPC can do to halt the flood of foreign buying, the great bulk of which is for cash and therefore not dependant on UK bank lending. In Hong Kong and Singapore, penalty rates of tax have been imposed on foreign buying, and it may yet come to that. For Britain, a better solution would simply be to increase supply, by reforming the byzantine planning system and thereby allowing a degree of construction on greenbelt sites and farmland. However, this is not in itself going to stop the more broadly based global stampede into prime real estate in the world’s most desirable cities – a much more intractable problem grown out of the dearth of decent alternative investment opportunities. This is in itself partly the result of the ultra low interest rate environment, which has ground returns on bonds down to levels where it is increasingly hard to keep pace with inflation. A general climate of risk aversion since the crisis began has also made companies wary of creating investment opportunities. Michael Kumhof, an economist at the International Monetary Fund, has argued that there is a direct connection between growing income and wealth inequality on the one hand, and asset bubbles and financial crises on the other. If an ever greater share of GDP is being concentrated in the hands of an ever smaller group of people, it tends to get saved rather than consumed. Kumhof’s contention is that these savings will get intermediated to lower income earners in the form of easy credit to sustain their consumption, resulting in an eventual debt crisis. Well, maybe. I’m a little sceptical of this line of argument myself, superficially compelling though it seems. It doesn’t, for instance, explain very high levels of UK investment in the Victorian age, or indeed the repeated financial crises of those days, when credit was not widely available to the masses. The Victorians tended to justify income and wealth inequality on the basis that only the rich were capable of accumulating sufficient wealth to fund investment and thereby create jobs and prosperity for all. In a more equal society, wealth would be consumed, not invested. So yes, there were investment booms resulting in financial crises and busts, but these were not the result of high earners lending their spoils to low earners. In any case, what’s going on at the moment with rising asset prices seems to be somewhat different; this is more a case of growing global wealth chasing a finite pool of desirable assets. There appear no solutions to such a problem, other than to make your country or city a bad place to invest. To do that is only to shoot yourself in the foot. Continue reading →