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German house price rally to slow but cheap money to keep it running

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© Reuters. FILE PHOTO: The skyline with its office buildings and the banking district are photographed during sunset as the spread of the coronavirus disease (COVID-19) continues and the German government plans new pandemic control measures in Frankfurt, Germany, No

By Zuzanna Szymanska and Jonathan Cable

BERLIN/LONDON (Reuters) – Home prices in Germany’s booming property market look set to rise sharply again in 2022 and, while the pace will ease in coming years, the increases will still outstrip general inflation, a Reuters poll found.

As in much of the world, many Germans spent most of the coronavirus pandemic working from home and those who could afford to move sought out larger, more expensive properties – fuelling home price rises.

Years of ultra-low borrowing costs have also made it cheaper for people to upsize or for first-time buyers to get onto the property ladder.

Historically, the German housing market was dominated by renters but the desire for a safe-haven investment, along with speculators, has grown in recent years, adding to the property market boom.

European Central Bank board member Isabel Schnabel said in February the bank must consider surging house prices when assessing inflation.

Much of the polling was conducted before Russia’s invasion of Ukraine, which could delay – or limit – any ECB considerations of tighter monetary policy. That in turn may support the housing market in the short term.

Home prices rose around 10% last year and were forecast to rise 6.3% this year, according to the Feb. 10-March 2 Reuters poll of 16 property market experts. That pace was expected to slow to 4.5% next year and then to 2.8% in 2024.

INFLATION

Yet consumer price inflation was pegged at 3.0%, 1.8% and 1.9%, respectively, in a January Reuters poll and the latest house price forecasts were an upgrade from the respective 6.0%, 4.0% and 2.0% given in November. [ECILT/EU]

“House prices will continue to rise, albeit at a somewhat slower pace than in the previous years,” said Carsten Brzeski, global head of macro at ING.

“Both the mismatch between supply and demand, currently fuelled by a stagnating supply, as well as high material and construction costs and the fight against climate change, for which energy-efficient housing plays a major role, will continue to drive house prices up in the coming years.”

Germany should curb a boom in house prices by setting caps on mortgages and forcing banks to build up more capital, the European Union’s financial stability watchdog said last month.

“The house price to income ratio is even higher than during the housing boom of the ’90s, particularly in big cities,” said Marco Wagner, senior economist at Commerzbank (DE:CBKG).

Asked to rate the affordability of German house prices on a scale of 1 to 10 where 1 was extremely cheap and 10 extremely expensive, analysts rated them 8. That matched the previous estimate and one of the highest medians given compared to other Reuters polls for major housing markets.

Respondents to an additional question said the ECB would have to lift its refinancing rate to 1.50% this year to significantly slow activity. It currently sits at zero and only 13 of 43 economists in a separate Reuters poll on ECB policy saw it rising at all this year.

“To significantly slow down activity, a sharp rise in interest rates is required, which is not to be expected to this extent,” said Pekka Sagner, economist for housing policy and property economics at the German Economic Institute.

(For other stories from the Reuters quarterly housing market polls:)

German house price rally to slow but cheap money to keep it running

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