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A family ritual will take place at the beginning of the week. Statisticians present the latest inflation figures and experts will frown with concern. Not because the rates of price increase are particularly high, but on the contrary: because they are very low.
A.M Monday Y Tuesday the Federal Statistical Office in Wiesbaden and Eurostat in Luxembourg will announce their estimates for the increase in consumer prices in Germany and the euro zone as a whole. There will be no signs of inflation. Indices hover somewhere around the zero line, as has been the case for a long time, especially since Covid-19 has kept the world on hold with closings and closes.
It’s staggering: the money supply in the euro zone is growing faster than it has been since the boom era of the 2000s. Sure, the numbers are exaggerated by the great uncertainty that is causing businesses and private citizens to hold stocks of Cash as a precaution. The economy is still down because of Corona, and with it the demand.
But over the next year, when enough people are vaccinated, the activity will increase significantly. So the convergence of supported needs, massive central bank interventions, and delayed public spending programs could set in motion price dynamics that cannot be easily curbed again.
There is a risk, economists at asset management multinational Blackrock warned, that major central banks lose control of price dynamics in the post-crown phase: along with pandemic-induced structural change, “this could increase in the next five years Lead to inflation ‘.
Possible. However, the experiences of the last two decades have been different: despite the largely lax monetary policy, the pressure on prices is low, because the global supply of goods and services creates very intense competition that has slowed down the lasting inflation.
But the money that central banks and the financial sector create has not gone away. It is in another place.
Gold, stocks, houses, everything flashes
Some of the excess liquidity flows to capital markets, where valuations are rising. And how. Gold has just hit new all-time highs. In terms of corporate earnings, stocks are more expensive than ever; The price / earnings ratio for US stocks is currently above 30, as calculations by Nobel laureate Robert Shiller of Yale University show, which by historical comparison looks suspiciously like a price bubble.
It is true that there are worse things than the fact that wealthy people play in the stock market with too expensive paper. But asset price inflation is now deeply affecting everyday life. Residential properties have also been affected for a long time. Especially in Germany.
Those who do not yet own real estate have to go into debt up to their ears
The economy is still in the crown crisis, many companies are threatened with bankruptcy and citizens fear losing their jobs (beware Tuesday Y Wednesday on new labor market figures). But at the same time, houses and apartments are getting more and more expensive. Between July and September, prices increased on average in Germany by 7.8 percent compared to the same period last year.
Even in an international comparison, the price increase is rapid. In real terms, that is, after deducting inflation, the dynamics in this country has been greater in the last decade than in almost all comparable countries, according to the Bank for International Settlements (BIS).
Until ten years ago, Germany was the boring real estate market of the Western Hemisphere. That has radically changed.
In the seven largest cities, condo prices have increased by half since 2015. It is not just the metropolises of Berlin, Hamburg, Munich, Frankfurt, Stuttgart, Cologne and Düsseldorf that are benefiting from the huge inflow of money. House prices are now rising across the board. Even in sparsely populated rural areas, according to figures from the Federal Statistical Office, the increase was around a third during the same period. The social consequences are serious:
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If you don’t already own real estate, you have to go into debt up to your ears to buy your own four walls, or you just can’t afford to own a home anymore.
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Anyone who has bought excessively rented real estate will try to raise the rents to generate adequate returns.
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Where rents are limited by the state, as is the case now in Berlin, investors are holding back, with the result that the real estate supply is likely to remain below potential.
In general, according to calculations by the Deutsche Bundesbank, residential properties are overvalued between 20 and 30 percent. Two questions arise: Are we facing a bubble that is about to burst in the foreseeable future? And: should central banks have to curb price increases?
Germany is shrinking, at least a little
The overall housing market data could hardly have been more favorable in the decade:
All of this drove demand, and with it prices. It is not clear whether these framework data will remain so overall. For the first time since 2010, the population declined slightly in the first half of 2020. This may be the beginning of a turnaround. Between 2010 and 2019, four and a half million more people moved to Germany than left. That more than made up for the decline in the local population. Now, the crisis in the crown has almost paralyzed immigration to Germany.
When it comes to future revenue trends, much will depend on how quickly Germany manages rapid structural change: more digitization, more climate protection, less industrial globalization. The efficiency with which the German economy, based on exports and industry, overcomes these challenges will be largely responsible for the development of wages. And indirectly also the real estate prices.
Coworking space in the country
Corona triggers a structural change that also affects the way of life, work and life and therefore the need for real estate. After the pandemic experience, many higher-earning employees will be asked how long they should be spending in the office and how much they want to be active in the home office or elsewhere.
New models of life and work can be realized. Living in the surrounding area, where you have a spacious place to stay with a corresponding studio (or you have access to one of the new rural coworking offers), plus the occasional connection to the metropolis, where you may still have a small apartment or a room in a shared flat. inhabited – completely new combinations of work and place of residence are conceivable.
The metropolises, the great winners of globalization, will lose relatively in this scenario, while the environment wins. So the surrounding area increases. That would warrant some airy evaluations in the field and in small towns.
In cities, however, some properties are likely to be more difficult to sell. Markets have been reacting for a long time: Real estate investment firms (REITs) with a focus on offices and retail have greatly lost their value since the outbreak of the pandemic. If commercial real estate and hotels can be converted into living space, this should ease the situation in the downtown real estate markets and put pressure on prices.
Every bubble bursts, at some point
So the situation is mixed. The fundamental factors of population and income do not have a clear direction. The more it depends on the interest. If financing became significantly more expensive, the German real estate miracle would quickly collapse.
But it doesn’t look like that at all. As long as inflation rates are low, central banks will stay on their ultra-expansive course. Even if price hikes increase in the next few years, they should let things go for a while without taking any countermeasures. The US Fed announced just that when it announced a new strategy a few months ago. It is hard to imagine the ECB taking a fundamentally different course.
Added to this is the historically high level of debt, which also limits the scope for interest rate hikes. A few years of notable inflation would even help reduce debt. However, the uncertainty about the stability of the monetary value will likely push more investors to the real estate markets.
It’s true: all bubbles pop, at some point. But before that happens, many billions will pass through the financial system.
