ECB can’t ignore developing housing bubble, Schnabel says

29th Frankfurt European Banking Congress (EBC) takes place in Frankfurt
FILE PHOTO: sabel Schnabel, member of the German advisory board of economic experts attends the 29th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski

November 9, 2021

FRANKFURT (Reuters) – European Central Bank policy cannot ignore a surge in property prices that has led to a potentially dangerous overvaluation, ECB board member Isabel Schnabel said on Tuesday.

House prices are rising quickly across much of the euro zone and low interest rates, combined with a particularly high savings rate, has led to a surge in property investments, especially among the bloc’s wealthiest households.

“Monetary policy cannot turn a blind eye on such developments in an institutional setting in which macroprudential policies are, in principle, the first line of defence but are not yet fully effective,” Schnabel said.

Schnabel, the head of the ECB’s market operations, said that house prices are currently overvalued relative to fundamentals in the euro zone as a whole, making them vulnerable to future price corrections.

Gradually shifting away from bond purchases would mitigate financial risks and lower the wealth distributional impact of monetary policy, Schnabel argued.

If housing costs were included in inflation data, that would have raised price growth by 0.4 to 0.5 percentage point in the second quarter, Schnabel argued, a big boost given that inflation is already running at twice the bank’s 2% target.

The ECB has undershot its inflation target for nearly a decade but the inclusion of housing costs would have put it at or near target for several years in the recent past, ECB research shows.

Responding to a recent academic debate on the sequencing of the ECB’s exit from exceptional stimulus, Schnabel rejected the idea of an interest rate increase before the end of bond purchases, also known as quantitative easing.

“In raising policy rates before ending net asset purchases, central banks would be willingly accepting losses on their balance sheets that would ultimately lead to losses for the average taxpayer, and the continuation of net asset purchases would benefit mostly wealthier households,” she said.

(Reporting by Balazs Koranyi; editing by Jonathan Oatis)