In many big European cities, prices have been rising for decades, pushed higher by a cocktail of low interest rates, land shortages and construction that cannot keep pace with demand. Despite the deep effects of the pandemic on Europe’s economies, prompting comparisons with the 2008 financial crisis, property price rises have picked up speed over the last year. Demand from stay-at-home workers desperate for space for an office has contributed to the price surge, while unprecedented fiscal and monetary stimulus aimed at keeping economies afloat have poured more fuel on the fire. Rising rents are a big problem for the city, where only about 17.4% of the population own their house or apartment. In Germany as a whole, roughly 50% of the population are renting and are exposed to rising rents eating up more disposable income.
Swiss bank UBS highlights Munich, Frankfurt, Amsterdam, Paris and Zurich as cities at risk of a property bubble. Four of the twelve European cities in UBS’s Global Real Estate Bubble Index are over-valued – including Stockholm – and only in Warsaw, Milan and Madrid were property prices reasonable. There is widespread agreement that Sweden’s mortgage tax relief should be gradually reduced and the highly-regulated rental market freed up. Building and planning rules should be eased, among other things. Average mortgage rates in Sweden, for example, are about 1.3% currently compared with around 6% in 2000 and 14.5% in 1985, for a floating rate loan. The European Central Bank has acknowledged localised bubbles, but it argues that there is no systemic overvaluation in housing. It has also called on local regulators to act on bubbles as the euro zone’s one-size-fits all monetary policy, designed to control inflation, is too blunt a tool to deal with local issues. With the pandemic still raging, rate-setters argue a cure for Europe’s housing ills based on higher rates would be worse than the disease.