Interest Rates Bubble [en]

Munich ranks worldwide number 2 of cities with highest bubble-risk-indicator.

The potential of a bubble is driven by a context of very low interest rates.

In the Euro-area, people, firms and the public sector tend to save money and pay off their debt because the debt-ratio is high.

If everyone saves money, prices go down.

To avoid a deflation, the central bank reacts by lowering the interest rates, so that saving becomes less attractive and borrowing more affordable.

This has an impact on longer term rates of credit-worthy borrowers.

So, people can afford more easily to borrow money to buy a flat and they do so.

In Munich, you can see some flats being sold with a rental yield lower than 2%.

So, there is a risk that people can't afford a mortgage anymore and stop buying flats with a low rental-yield.

Because the low interest rates are the result of a high level of debt, the question is to know how fast countries in the Eurozone can reduce their debt-burden.

By measuring the difference between long-term and short-term interest rates, we can see what the market expectation is.

If you can save money at 3% and borrow money at 4%, why would you take more risk and buy a flat with only 2 or 3% rental yield?

So, interest rates are a real risk for the housing market in Munich.

You cannot do anything against a drop of prices, so you cannot repair a broken investment.

But if you fix the interest rate of your mortgage for a long period of time and if you pay it off quickly, you may avoid problems when you have to refinance it.

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