ECB liquidity threatens to ‘flood’ the real estate market

In mid-November, Christine Lagarde, president of the European Central Bank (ECB), proposed in the Community Parliament that the indicators that measure the evolution of prices (such as the CPI) – whose control is the main mandate of the institution that manages the monetary policy of the eurozone-, will include housing to “improve” them. On other occasions, the French and other ECB officials have stopped with concern at the rise in the price of real estate assets, even warning of the threat of bubbles. What the institution has never directly admitted is the relationship between the expansive monetary policy adopted in recent years, and intensified to respond to the Covid crisis, with precisely the increase in the price of homes.

Whether the ECB admits it or not, the impact of keeping benchmark interest rates at 0% -historical lows- and of injecting large amounts of money (see graph) inevitably has repercussions on the real estate market. These extraordinary measures have prevented a liquidity shock and that a tightening of financing conditions has stifled the economic recovery. But it has also facilitated access to mortgages and has derived a good part of that cheap money to buy houses, whether for residential or investment purposes, just as the valuations of the stock market and especially of the debt have increased.

Now, with the economic recovery progressing, and to control the inflation peaks that are causing the demand contained in the confinements, the bottlenecks in world trade and the high cost of energy, the main central banks have already started the process of withdrawing monetary stimuli, which should end with an increase in interest rates that would automatically make mortgages more expensive, financing in general and would then contract the demand for housing, eliminating the possibility of a bubble.

However, the multiple uncertainties suggest that this path will be slow in general, and mainly in the euro area, where the ECB presented on Thursday a roadmap for a gradual withdrawal of liquidity injections, in which a wide margin was left to increase its ability to intervene in the market to the extent that it deems necessary.

Of course, without setting a date to raise benchmark interest rates, something that analysts’ forecasts delay, on average, until 2024, and which supports the medium-term inflation outlook to remain below, around 1, 85%, this Friday, of the goal of the institution chaired by Lagarde, which stands at 2% or temporarily above.

More expensive homes

Before the pandemic, a CaixaBank report calculated that “a reduction of 1 percentage point in mortgage interest rates allows financing a property 10% more expensive”. The conclusions are clear: “The environment of low interest rates is also pushing the price of housing up, on the one hand, it encourages investment in housing, by generating a lower return on financial savings products and, in addition, it allows access to more expensive homes. “