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Investors shun 'disastrous' bonds to scoop up property in Europe
[MADRID] With the clock ticking on the European Central Bank (ECB) relaunching stimulus to stoke eurozone growth and prices, one corner of the economy needs no push: housing.
Home prices in the euro area increased 4.6 per cent on average last year, near the fastest since before the financial crisis. Even with a slowdown so far in 2019, they're still rising at about triple the rate of consumer-price inflation.
It's not exactly an out-of-control boom, but compared with the continent's US$9 trillion debt pile, where low and negative yields mean investors can't even beat inflation in many cases, it's a yield-hunter's dream. Economists and real estate consultants say housing will continue to run relatively hot for another one or two years, generating returns of about 4 per cent while eurozone government debt struggles to yield more than 1 per cent.
"Real estate is one of a very few investments that's still making decent returns,'' said Alejandro Inurrieta, an economist who helped write the first Reit legislation in Spain, a fast-recovering property market that's attracted Blackstone and Cerberus. "Fixed-income looks disastrous for big investors like pension funds, and even for small savers.''
Peter Jun, co-founder of real estate consultant Arminius Group in Jersey, says large, long-term investors in Europe and Asia have increasingly turned to property and infrastructure.
"The German pension funds are happy holding a residential or commercial property 10-20 years, to get a running annual cash return of 4 per cent," he said. "They know the 10-year bund is a money loser.''
Europe is awash with debt yielding below zero, including German bonds out to 15 years. That mountain could continue to grow if the ECB and the Federal Reserve, as expected, cut interest rates this year. The Fed may loosen by as much as 50 basis points as soon as this month.
In the euro area, house-price inflation of 5 per cent or more are still being seen in Germany, Netherlands and Spain. Portugal is close to double digits.
If the low-rate environment keeps pushing property investment, that could be storing up other problems down the line. Bloomberg Economics analysis shows house prices globally remain elevated on a number of metrics. It sees Canada and New Zealand most vulnerable to a correction, but there's also alarm bells around Australia, Norway, Sweden and the UK.
"There's a risk that a global round of monetary easing may fuel new housing bubbles. While central bankers are focused on avoiding a global economic downturn, looser monetary policy could sow the seeds of the next crisis," said Niraj Shah, Bloomberg economist.
Low interest rates, along with 2.6 trillion euros (S$3.97 trillion) of ECB asset purchases, helped the 19-nation eurozone recover from the financial crisis and helped send home prices up 18 per cent in the last five years. The recovery extended beyond the single-currency zone across Europe's US$28 trillion housing market, particularly eastward.
But euro area consumer prices have risen only about 5.5 per cent since 2013. The property price surge is barely reflected there because of its small weighting in the calculations.
With inflation still below its goal, the ECB has primed markets to expect more stimulus later this year. Its deposit rate is already minus 0.4 per cent, but action could include more cuts and a relaunch of quantitative easing.
"Usually when you have a low-growth economy like this, real estate is also kind of dead - but not now," Mr Inurrieta said. "These are strange times."