The biggest decline in house prices dates back to 2000, triggered by the ECB’s largest ever QT and highest interest rates.
Written by Wolf Richter of Wolf Street.
Germany is a great example of how ultra-low interest rates and massive quantitative easing can affect house prices. It drives home prices into a frenzy. And the impact of rate hikes and QT on home prices will worsen prices.
Therefore, the ECB deposit rate is currently 4.0%, up from -0.5% in June 2022. And since its peak in summer 2022, the ECB has cut €1.85 trillion from its balance sheet, or about 40% of its assets. It accumulated during the pandemic and accounted for 21% of total assets.
The ECB’s QE came in two forms. One is the large and highly attractive bank loans that banks can use to purchase assets. Purchase of all types of bonds, including large amounts of corporate bonds. Pandemic-era loans have now been completely unwound. And bond holdings are being released at an accelerated pace.
In 2008, ECB policy began to spiral out of control, first in response to the global financial crisis, then in response to the euro area debt crisis, and then in 2016, as a reaction to the absence of a crisis, the ECB turned deposit rates negative. , and then, in response to the pandemic, the ECB completely blown the fuse.
As these policies pushed down long-term interest rates, including mortgage rates, German house prices more than doubled in 12 years, while at the same time the ECB’s balance sheet increased ninefold over the same period, from €1 trillion to nearly €9. It increased to Trillion. But that was then and this is now.
Used home prices Third-quarter sales in Germany fell a further 1.5% from the second quarter, marking the fifth consecutive quarter of decline, according to German statistics agency Destatis on Friday. Used single-family homes, two-family homes, and condominiums.
Year-on-year, prices fell by 11.2%. The year-over-year declines in Q1, Q2, and Q3 were the steepest in data since 2000.
From its peak in Q2 2022, prices have fallen 12.0%.
From 2010 to its peak in Q2 2022, the index soared 104%. Look at how the ECB blew a fuse during the pandemic. The index has now undone nearly all of its gains since January 2021.
Newly built house price – New single-family homes, duplexes, and condominiums – decreased by 0.6% in the quarter and 4.5% year over year from the same peak in Q3 2022. The index has now undone nearly all of its gains since the second quarter of 2021. Between 2010 and the peak in 2022, prices soared 80%.
Single-family and two-family homes were the hardest hit.. Of all existing and new homes, prices for single-family and duplex homes declined the most. In the seven largest metropolitan areas (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf), it was -12.7% year-on-year. ; -12.4% compared to the previous year in densely populated areas.
Condos also fell, but not by as much. -9.1% year over year for the seven largest metropolitan areas. -5.6% year-on-year in densely populated areas.
House prices and the ECB balance sheet. The composite home price index, which covers new and used single-family homes, duplexes and condominiums, fell 1.4% in the quarter, down 10.2% year over year and down 10.9% from its peak in Q2 2022.
And this overall house price index is what is used in the grand comparison with the ECB’s balance sheet. This graph shows Germany’s overall house price index (red, left scale) and his ECB’s total assets in trillions of euros (purple, right scale).
This shows the reality of QE. Suppression of interest rates through policy interest rates (short-term interest rates) and QE (long-term interest rates) causes housing prices to soar. And when interest rates are high and QT is high, the equation is reversed and home prices rise.
Their movements are not proportional. The house price index has almost doubled between 2000 and 2022, and the balance sheet has increased about 9 times. But over the past decade, they have been moving vigorously in the same direction.
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