The pandemic boom in house prices in Europe raises fears of a new bubble


If the Swedish government succeeds, Bromma Airport, at the western end of Stockholm, will close and be used to build around 30,000 new homes, helping alleviate the housing shortage that has driven up housing costs. prices in the capital.

Sweden is not alone in seeking innovative ways to boost housing supply and ultimately reduce the build-up of mortgage debt that threatens the economy as a whole.

In many major European cities, prices have been rising for decades, pushed up by a cocktail of low interest rates, land shortages and construction that cannot keep pace with demand.

At the old Berlin Tegel Airport, which closed in November last year, city officials plan to build more than 5,000 apartments. Politicians are also wondering if they can build social housing at the old Tempelhof airport in the heart of the city.

“In the medium term, we need some 200,000 additional apartments,” said Berlin Housing Senator Sebastian Scheel, adding that half of these apartments should be built by the public sector and subsidized under social housing rules.

Despite the profound effects of the pandemic on European economies, prompting comparisons with the 2008 financial crisis, the rise in house prices has accelerated over the past year.

Demand from desperate housewives in search of office space has contributed to the price spike, while unprecedented fiscal and monetary stimulus aimed at keeping economies afloat have added oil to the economy. fire.

UK Finance Minister Rishi Sunak’s March budget extended a temporary reduction in the property purchase tax and announced a new program to help first-time buyers struggling to raise a down payment. UK house prices registered their biggest monthly increase in more than 17 years last month.

“What we expected to see was about the same as in 2008 – that prices would drop,” said Kate Everett-Allan, head of international residential research at real estate consulting firm Knight Frank.

“We had no idea how much governments were going to support the market.”

In Berlin, prices are up 11% from a year ago, the Global Property Guide, a residential property research site, showed.

And rising rents are a big deal for the city, where only about 17.4% of the population owns their homes or apartments. In Germany as a whole, around 50% of the population is renter and is exposed to an increase in rents which consumes more disposable income.

As Germany’s federal election looms in September, politicians scramble to show voters they can solve the crisis, promising a mix of new social housing, more building land and tighter federal rules against excessive increases rents. But a quick fix is ​​unlikely.

Stockholm, Luxembourg, Moscow and Bratislava have all seen double-digit increases in the past 12 months, although in a small number of cities, like Madrid, prices have come down.

Swiss bank UBS highlights Munich, Frankfurt, Amsterdam, Paris and Zurich as cities at risk of a real estate bubble. Four of the twelve European cities in UBS’s Global Real Estate Bubble Index are overvalued – including Stockholm – and it was only in Warsaw, Milan and Madrid that real estate prices were reasonable.

“In the short term, the only solution is (for people) (…) to borrow more and more and this is a concern not only for individuals but for society as a whole,” said the governor of Swedish central bank Stefan Ingves.

This week, Finland’s central bank warned of household debt levels, echoing concerns from the Swedish Riksbank and many other European authorities about the threat to the financial system.

Household debt levels in the Nordic countries are among the highest in the world relative to disposable income, according to OECD data.

NOT IN MY GARDEN

Finding new places to build to increase the supply is not easy.

At Bromma Airport, traffic levels plummeted during the pandemic, but Arlanda – Stockholm’s main airport – may not have the capacity to cope if flights are transferred there.

The Swedish Moderate Party, the largest opposition party, has said it will cancel any deal to shut down Bromma if it wins the election next year, unless an expansion of Arlanda occurs.

In Berlin, a referendum in 2014 rejected construction on Tempelhof and a new referendum would be needed to reverse this decision.

In Britain, the government in April announced plans to convert empty offices into housing as part of a COVID-19 stimulus package, with a goal of creating 1,500 new homes by 2030.

Earlier this year, he introduced new laws to make it easier to convert disused stores into homes.

Even if these programs are implemented, they will hardly hamper demand.

The Swedish Housing Authority, for example, estimates that the capital would need a development the size of Bromma Airport every year this decade to fill the housing gap. Analysts say more comprehensive structural changes are needed to balance the housing market.

It is widely accepted that Sweden’s tax break for mortgages should be gradually reduced and the highly regulated rental market should be freed up. Building and town planning rules should be relaxed, among other things.

But many politicians see interference in housing policy as a definite loser, and few are brave enough to upset the status quo.

Earlier this week, Swedish Prime Minister Stefan Lofven rejected the reintroduction of a property tax – scrapped in 2008 by the then-center-right government and seen as a key element in containing soaring house prices. He faces a close election next year.

Average mortgage rates in Sweden, for example, are currently around 1.3% compared to around 6% in 2000 and 14.5% in 1985, for a variable rate loan.

In the short term, many economists are looking to central banks to play the party bonkers, tightening their policies to make borrowing more expensive.

In New Zealand, for example, house prices have been added to the central bank’s mandate due to concerns about the country’s property market.

The European Central Bank has acknowledged the existence of localized bubbles, but maintains that there is no systemic overvaluation of housing.

He also called on local regulators to act on bubbles because the euro area’s single monetary policy, designed to control inflation, is too blunt a tool to deal with local problems.

While the pandemic still rages on, lawmakers argue that a cure for housing woes in Europe based on higher rates would be worse than the disease.

“We would, quite simply, kill off the recovery we are seeing in the Swedish economy, before it really gets off the ground,” Swedish central bank deputy governor Anna Breman said in April.

Our standards: Thomson Reuters Trust Principles.


About Eleanor Blackburn

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