Increase in property prices leads to overvaluation says ECB board member

Among the bloc’s wealthiest households, house prices are increasing rapidly across much of the eurozone. Low-interest rates, combined with an especially high savings rate, have led to a spurt in property investments.

On Tuesday ECB board member Isabel Schnabel said European Central Bank policy cannot disregard a spurt in property prices that has driven to a potentially formidable overvaluation.

Among the bloc’s wealthiest households, house prices are increasing rapidly across much of the eurozone. Low-interest rates, combined with an especially high savings rate, have led to a spurt in property investments.

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

The head of the ECB’s market operations, Schnabel said as compared to fundamentals at the eurozone house prices are presently overvalued. As a result of future price corrections making them vulnerable. Schnabel asserted that slowly drifting away from bond investments would mitigate financial dangers and lower the wealth distributional consequence of monetary policy.

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

In the second quarter, if housing costs were encompassed in inflation data, that would have boosted price progress by 0.4 to 0.5 percentage points, Schnabel argued, a big gain given that inflation is already operating at twice the bank’s 2% target.

Reacting to a recent academic discussion on the sequencing of the ECB’s exit from exceptional stimulus, Schnabel dismissed the idea of an interest rate boost before the end of bond purchases, also noticed 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.