[jcbrand]

House prices are driven upwards due to low interest rates, so this move will most likely only exacerbate the already high house prices.

I'm not sure about Denmark, but in Germany house prices have about doubled in the last 10 years, (with the ECB insisting there's no inflation).

Given the choice between high interest rates and cheaper house prices, versus low interest rates and expensive houses, I'd rather take the former, since rates can always come down again, allowing you to refinance and pay less for your house overall.

When (in the current environment) rates start going up again (they're basically at the lower bound now), house prices will fall, however home "owners" (with mortgages) won't pay less for their houses because their mortgages are fixed (and if they weren't fixed, they'd be doubly screwed by the high rates).

[frafra]

You are right about the house prices in Germany, but your statement about ECB is not entirely correct.

ECB does not "insist there is no inflation" in Germany or in Europe: in both cases it has been around 2 % for the last 20 years: https://portal.dataviz.ecb.europa.eu/views/HICP_dashboard_ET...

There is a reason why the ECB estimation of inflation (HICP) seems lower than expected in your experience: it does not take into account owner-occupied housing (OOH) prices, which include O.1.1.1.1 (Purchases of new dwellings index). Mario Draghi (former resident of the ECB) was in favour of that, but the European Commission thinks that OOH is not suitable to be included in HICP yet.

References: - https://ec.europa.eu/transparency/regdoc/rep/1/2018/EN/COM-2... - https://www.ecb.europa.eu/pub/pdf/other/ecb.mepletter180615_...

[bjeds]

I may be tired or dumb, but your argument sounds circular to me. Of course the ECB won't insist there is no inflation if they themselves have defined housing to not be included in the definition they use to measure inflation. This doesn't mean that the parent commentator is wrong nor does it imply that ECB is correct in their definition. For most people, housing is a significant cost in day to day life, and will of course be felt as inflation, regardless of how it's defined and measured in monetary policy.

If it were up to me, housing should also be included in the definition of inflation. That would be a good way to lay bare the downsides with an aggressively expanding monetary policy.

[frafra]

It is not a circular argument to show that a statement is not correct: ECB never said there is no inflation in the first place. ~2% is not "no inflation"; 2% is the target that the ECB aims at.

In addition to that, I added an explanation why such a number seems lower that you could expect.

Please note that ECB does not define the HICP, the European Commission does it: https://ec.europa.eu/eurostat/web/hicp/faq

[zo1]

Well if house prices have indeed doubled in 10 years then that means inflation during that period was about 7.2%, not 2% as they claim. Saying inflation is 2% instead of 7% can be seen as "insisting there's no inflation".

I.e. the statement was a bit of hyperbole to indicate that the ECB is hiding or misrepresenting the real rate of inflation.

And without more detailed info, hiding/excluding inflation increases in one of the biggest expenses that people have to account for in their daily life seems like confusion of the highest order.

[IkmoIkmo]

Residential real estate for owner-occupiers is rarely a cash-based sector. The vast majority of owner-occupier buyers will get a mortgage.

That means that in this industry it makes more sense to look at the cost of the mortgage, than the cost of the home.

Particularly because a home is an asset, like a stock in a company. The fact it goes up in price isn't 'inflation' in the sense of the consumer price index (i.e. prices for consumption).

What is more relevant to measure as part of inflation in the sense of consumption, are the monthly costs around housing, regardless of the price of the underlying asset. For example, if interest rates went to 30%, and housing prices dropped sharply because of reduced financing capacity, we would not say that housing got cheaper or more affordable. We'd rightly look at monthly housing costs and saw that due to 30% interest rates, it got a lot more expensive.

So it makes little sense to say 'prices doubled, so inflation is 7.2%'. You'd have to look at monthly housing costs, which have not risen that much, due to interest rates dropping over time. For example, a 300k home in the US (interest rate 3.5%) costs as much (read: same monthly payments) over 30 years as a 485k home (60% more expensive) at 0% interest rates like in Denmark. So it makes sense that in a world where interest rates are dropping, you can see home prices go up much faster than housing costs / monthly payments / interest rates.

If you look at it from purely a cost-perspective (excluding principal paydown, as it's only a negative a cashflow, but not an expense), the difference in monthly costs between e.g. 0% and 3% becomes even bigger, allowing for even larger price differences that don't translate into monthly cost differences.

[frafra]

"ECB is hiding or misrepresenting the real rate of inflation." ECB has no role on that, which as I said was in favour of including house prices in the HICP. It is the European Commission deciding on that: https://ec.europa.eu/eurostat/web/hicp/faq

Please note that "H" stands for "harmonized", and that is one of the issues. If you change how the HICP is defined, then all the countries should produce the new indexes that should be included, with the same methodology. That is a challenge and a national political issue too in some cases.

[karatinversion]

> Well if house prices have indeed doubled in 10 years then that means inflation during that period was about 7.2%, not 2% as they claim.

A rise in the price of one thing does not mean that rate is the rate of inflation - relative price shifts happen.

[IkmoIkmo]

> it does not take into account owner-occupied housing (OOH) prices

It does however take into account rental prices, which exceed owner-occupied housing costs. So the idea that housing cost inflation is fully absent from EU inflation numbers (not you that's saying it, but sometimes implied in various discussions) isn't quite true, either.

Housing costs as a percentage of income for owner-occupiers hasn't risen all that much due to the low interest rates, and is below peaks we saw in the past. Even in nominal figures, due to lower rates, monthly payments are lower too (ceteris paribus). I don't think including OOH costs would massively increase inflation the way people think, at least not if looked at from a cost-perspective. (i.e., interest, maintenance, taxes, hoa etc).

For example, the total payment on a 300k home with 3.5% rates (like the US) vs 0% rates (like Denmark) is 485k vs 300k. That means in the US you could bid 60% more in a world where interest rates dropped to 0% overnight, while having no change in your total costs. That's what's happening in much of Europe: home prices rising purely due to lower interest rates, without necessarily increasing monthly housing costs, for owner-occupiers.

For renters, different story, but that's included in the inflation figures already.

[frafra]

You are right, thanks for specifying it.

[BlargMcLarg]

Same thing in the Netherlands. Prices doubling. The monthly costs are similar to years ago, but the high barrier to entry makes it impossible for young people to get anything similar to previous generations for the same money. As a result, rent goes up and young people now pay much more rent than before, semi-forced.

Low rates do not help when the market is this overheated. Worse, disincentivising people from prematurely paying their mortgage sounds like a great idea for recreating a certain crisis not too long ago.

[jacobion]

I think there might be two things going on here: one is a rise in various forms of social inequality, between generations, between people living in tier one cities and smaller cities or towns, between workers in certain industries and the rest. I tend to think this is bad, but I don't think it's related to interest rates.

The other is the culmination of a fifty-year process set in motion when Western economies went from gold-backed currency to fiat currency, and then from political control of currency to independent Central Banks. During this period both inflation and interest rate have moved monotonically downwards, essentially both to zero.

What if you assume that this state of affairs is strange because new, but perfectly benign, and will last indefinitely? It's absolutely true that those people who bought housing and other assets when rates were 10% have profited from a huge windfall. However, it's a one-off windfall. They simply got a discount, because 20/30/40 years ago, borrowing long term to pay cash was hugely burdensome. Today's homebuyers will buy assets at prices which reflect low interest rates, and they will pay low interest rates on their loans. As young workers, they might actually be better off in the long run. In a long term regime of zero rates, more of society's wealth is going to producers (and risk-takers), less is going to people who just hoard cash.

You might think it's nice for society to do something to correct this one-off inequality. Maybe so, but it's not fundamentally different to the other inequalities which exist. In particular, it's unclear why either artificially raising rates or artificially raising inflation are the solution. Neither of these are particularly effective in helping people who have got the short end of the stick. Both benefit some groups of rich people and some groups of poor people, and harm some other groups. There are much better solutions which can be pursued by governments directly without political interference in currencies.

Of course the type of person (job, family status, education level) who could buy a house in Berlin or London in the 1990's could not buy that same house today. You can either say 'too bad, you were out competed', or you can try to do something about it: pay teachers and social workers more, build more houses, make smaller cities more desirable to live in, provide better training and career opportunities etc. Blaming this on the dubious idea that cash in the bank should accrue 8% interest per year lets governments off the hook for actually solving the problems, and just advocates a different set of inequalities and broken incentives.

[jcbrand]

but I don't think it's related to interest rates.

It absolutely does have to do with interest rates. Rates are kept artificially low by central banks due to all the debt that has been accumulated the last decades. We're at the end of a long-term debt cycle.

It's quite easy to see how artificially low interest rates are increasing social inequality.

Just look at house prices, the older generation who predominantly own houses have had their wealth inflated by increasing house prices and that has happened due to low rates.

Younger generations are often priced out of buying homes.

What if you assume that this state of affairs is strange because new, but perfectly benign, and will last indefinitely?

You mean this time it's different?

The current setup is not sustainable. Debt is growing faster than income/GDP all over the world (since before Covid).

In a long term regime of zero rates, more of society's wealth is going to producers (and risk-takers), less is going to people who just hoard cash.

Savings is not "hoarded cash". Saved money is usually put to productive use by banks loaning it out again to other people.

Money spent on real-estate on the other hand, is not put to productive use and does not meaningfully grow the economy.

[jacobion]

'artificially low'

What do you think the natural rate of interest should be? Why?

[jcbrand]

I don't need to know what the natural rate would be to know that the current rate is artificially low.

Central banks drive down the rates by buying government debt that would otherwise have to be sold to the rest of the market.

They're therefore adding a massive amount of demand for the debt, thereby pushing up the price (and reducing the interest).

[firebacon]

The average price of existing houses in the Netherlands increased by 55% since 2013.

Source: https://www.cbs.nl/en-gb/news/2020/52/house-prices-almost-9-...

[BlargMcLarg]

I wouldn't call 55% in 7 years "only". Especially given this statistic doesn't highlight type of housing and price groups (read: housing in the far outskirts pulling averages down, though COVID is changing this dynamic). Starter wages have barely risen since then, let alone kept up. And along with the crisis, one now gets far less mortgage for the same inflation-adjusted salary than in 2013, despite the lower rates.

[the-dude]

Case in point : I owned a 300k house with my ex, we had a variable Euribor mortage taken out in 2004. With the Euribor at zero or below, the actual rate was close to 0.5%. Roughly translated to about €200 a month.

Now I am renting, a third of the space, for about three times the money ( maybe even more ).

[pizza234]

I'm very skeptical at the following claim, if taken at face value:

> Germany house prices have about doubled in the last 10 years

In the capital, prices 10 years ago were extremely low. People who bought apartments between 10 and 20 ago bought them as low as 1000€/sqm, which is exceptionally low for a European capital.

Under such conditions, price doubling is expected independently of any policy.

[allendoerfer]

Berlin is not a normal European capital in almost every way. Look at Frankfurt (financial capital of Germany/EU) or Munich (capital of Bavaria) if you want to see how Berlin would be if it were "normal". Then you will find stuff like this [0].

[0]: https://www.ubs.com/global/en/media/display-page-ndp/en-2020...

[Cthulhu_]

10 years ago was the peak of the housing bubble collapse (or just after), so the price of houses was depressed for a while.

That said, housing prices have gone up by ridiculous amounts since then, in part thanks to economic recovery, in part due to low mortgage interest rates, and in part (linked) due to low savings account rates. Better to put that money in real estate (and more risky investments on the stock market) than let it wither in a savings account.

But hey, for a while a few people made a lot of money.

[raxxorrax]

Berlin isn't representative. It has comparatively and surprisingly low prices on housing.

Don't know if prices doubled, but it is increasingly difficult for younger people to acquire a home.

People said the Euro helped Germany, and maybe that is correct, but that would be restricted to exporters. For almost everyone else it was a net loss.

Electronics got pretty cheap I guess...

[martin_bech]

German housing is a litle different, as many prefer to rent, so less demand for beeing an owner.

[raxxorrax]

True, if I have no chance to finance it, you prefer renting compared to homelessness.

But workplace mobility, yeah!

[p1esk]

Why do they prefer to rent?

[allendoerfer]

After WWII the German government created strict renter protection laws and the state invested heavily in relatively high quality public housing. You can compare the results to the UK, which cities were also bombed, but invested in private housing instead. Germany also famously had been "the sick man of Europe" before the current boom, were real wages did not rise for a long time.

[PartiallyTyped]

I am paying a 950 euro rent for a <24 sq meters in Copenhagen, not downtown Copenhagen, inc water/electricity/heat/washer/drier. The situation is absurd. Back home (still in Europe) I paid half for 35-40 sq meters. Yes, the salaries offset some of it, but still..

[Cthulhu_]

The salaries you're eligible for offset some of it, but there are a lot of people that have to get by on minimum wage in the big cities as well.

Instead of making mortgages more attractive, I think governments should increase minimum wage. If they do a correction to match up with inflation (and cost of living, since the two don't seem to align), suddenly minimum wage will jump to €30/hour.

[jacobion]

Why do low interest rates cause high rents? High house prices sure, but why does it affect rents?

You prefer to live in Copenhagen than the part of Europe you come from, for the higher salaries among other reasons. Probably lots of other people share your preference. Doesn't this suffice to explain why rents are much higher in Copenhagen than in your home region?

[throwaway-8c93]

> with the ECB insisting there's no inflation

House prices are represented in the consumer price index as 'imputed rent', generally by far the highest weight item. Last time I checked, its weight was at 9%.

[throw893232]

Little trick for a piece of mind:

Recalculate prices and salary into gold. You will discover that things are more or less the same and stable. Shoemaker in 15th century made similar money as today.

[OscarCunningham]

Given that the gold price has increased by a factor of 8 in the last 20 years it's hard to see how that could be true. Even if it happens that there's an equivalence between today and 1450, a shoemaker in 2000 would be earning 8 times more.

EDIT: To put it another way, over the last 20 years the Dollar, Euro and Pound have all approximately averaged out to their target 2% inflation rate. Prices in gold terms have averaged to 9% deflation per year. Since 9 > 2, gold is less stable than modern fiat currencies.

[bdjfkrk]

Not sure shoemaker is a good example. Wouldn't that today be Nike, Adidas, huge corporations and not individuals?

An individual shoemaker today is probably in the luxury business.

[martin_bech]

You are right, houseprices in denmark are going crazy..

But makes sense since 0% fixed mortgages.. you can get a 30year fixed at 0.5% with the option of only paying the interest, for the first 10years