Summary of the October Monthly Report

House price increases since 2010: determinants and regional dependencies 

Housing prices in Germany have been rising significantly since 2010. This development has mainly been driven by an increase in demand, which has been greater than would generally be expected during a period of economic recovery. Contributory factors in this turnaround on the housing market were the solid economic growth and the sustained favourable developments on the labour market, which have led to renewed confidence in the performance of the German economy in recent years. The impact of the financial and sovereign debt crisis, which includes the low interest rates for mortgage loans, should also not be underestimated.Real estate investment is also being seen in a different light owing to the very low yields on alternative investments and the financial market setting, which is characterised by heightened uncertainty.

This has bolstered demand for apartments in particular. So far, it has primarily been the property markets in urban areas that have been affected by the price hikes. Measured on the basis of the longer-term demographic and economic determinants, apartments in these areas are currently likely to be overvalued by an average of between 5% and 10%. In the attractive large German cities, the upward deviations are, in some cases, as high as 20%. By contrast, the prices of single-family houses in both urban and rural areas do not appear to differ perceptibly from the fundamentally justified level.

In the meantime, there are indications that the price rises are spreading from towns and cities to their surrounding areas. According to studies, these geographical effects could, in part, be due to determinants the impact of which goes beyond regional borders.Given that there is also evidence of purely price-based transmission channels, it cannot be ruled out that inflated expectations or speculation motives are fostering the regional dispersion of price impulses. Moreover, it is unlikely that the price pressure on the housing markets will ease over the short term. This is due to the fact that, despite the substantial growth in housing construction, the expansion in housing supply is still not sufficient to meet the additional demand for housing, especially the need for new apartments. The incentives to invest must therefore remain consistent with market demand.

No substantial macroeconomic risks are arising from the price structure on the housing markets at present. The observed price movements reflect the lagged expansion of the housing supply. Possible price corrections could give rise to perceptible wealth losses for households, but growth in mortgage loans is still sluggish on the whole.

Finally, it should be noted that the results presented here are prone to considerable estimation uncertainty. This is due, first, to the fact that the data for property markets still contains gaps, despite the substantial improvements that have been made over the past few years. Second, there is uncertainty regarding the price effect of key determinants. At the current end, this affects interest rates, in particular.

Macroeconomic approaches for assessing price competitiveness

Real effective exchange rates are normally used as indicators of a country’s price competitiveness in macroeconomic terms. These are particularly useful for detecting changes in competitiveness.However, in order to estimate the competitive position, ie the level of price competitiveness, these indicators must be compared with an appropriate benchmark value.In practice, such benchmark values are determined using a range of concepts, which are based on various economic theories.

The latest edition of the Monthly Report presents a number of customary approaches for assessing a country’s competitive position and discusses the extent to which these can be used as competitiveness indicators. The focus of the report lies on an indicator that is based on the productivity approach. If this indicator is used – together with the deviation in the price competitiveness indicator from its long-term average – to determine the German economy’s competitive position, both indicators suggest a competitive edge for Germany at present. This advantage is, however, not so pronounced that the German economy’s international competitiveness can be regarded as secure for the long term in a rapidly changing environment without further efforts.

An assessment of price competitiveness based on the productivity approach may be applied to a large group of countries, including emerging market economies that are undergoing an economic catch-up process. As examples, the competiveness results are shown for the three largest economies outside the euro area, ie the United States, Japan and China.

International cooperation in the area of financial sector policies – the Financial Stability Board (FSB)

On the Financial Stability Board (FSB), central banks, finance ministries and supervisory authorities of the key economies work together with international financial institutions and standard-setting bodies. The Bundesbank, too, is a member of the FSB and also belonged to the body’s predecessor, the Financial Stability Forum (FSF).The FSB continuously monitors the stability of the international financial system and promotes financial sector regulation. Following the mandate provided by the G20 heads of state and government, at the beginning of this year the FSB was given an institutional basis with its own legal personality, greater financial autonomy and sound internal governance.

The FSB is the G20’s central point of contact for all financial sector issues and therefore forms an integral part of international financial sector policy making.The G20 assigned the FSB a leading role in analysing the financial crisis and tasked it with regularly reporting to the highest political level. Key FSB duties include dealing with systemically important financial institutions and improving the oversight and regulation of the shadow banking system. To this end, the FSB has created a comprehensive regulatory framework and is rigorously promoting its implementation. The FSB’s role of cross-sector coordinator gives international financial sector policy a new quality.

The members of the FSB have undertaken to apply international standards and implement agreed reforms consistently and on schedule. The FSB insists on compliance with this undertaking and monitors implementation by means of peer reviews, among other things.Given that the FSB’s recommendations are not legally binding, political support from the G20 remains crucial to the body’s success and the regulatory response to the financial crisis in general.