Trade wars, political shifts and more... what does it mean for you as prospective house buyer and borrower?
Talk about trade wars has dominated much of the economic press lately. At the meeting of the 20 most powerful countries (the G-20) in Argentina this weekend, Trump met his Chinese counterpart President Xi-Jinping for the first time since the US imposed trade sanctions. This came on the heels of US elections where Democrats won the majority of the house of Congress.
What does this mean for the case to buy a house in Germany and Berlin more in particular?
It is clear that the world is no longer in a perfect “goldilocks” scenario of high growth, and low inflation. Instead, growth has slowed, inflation crept up, and the chance of a recession has increased. Indeed talk of trade wars and sanctions is not good for business. The Chinese economy is slowing down and this is rippling through the world. Add to that some major hiccups in the German car manufacturing industry, and the picture is a lot less pretty than it was just 10 months ago.
The advanced indicator for European economic activity (PMI) has dropped a lot this year but shows some tepid sign of turning up again.
This is relevant for you as prospective house buyer because, during a prolonged recession house prices may decline. We do not expect such a recession at this stage, and instead expect house prices notably in the Berlin region to continue rising for the time being. Why? First because the best indicators 1/ do not signal a crisis yet; and second because there is still a lot of positive momentum in the world economies.
As regards to house prices, the house market in Berlin is tight and this tightness is not likely to change soon, even with some economic slowdown in the German economy. Keep in mind that a house market is bit like an oil tanker, it does not change direction quickly… As house prices have been rising quickly the most likely scenario is for them to keeping growing but perhaps at a bit more modest clip.
What about the mortgage interest costs? Interest rates showed some sign to move up earlier this year, notably in January and then showed some signs of trying to stage a minor rally again in April and September. But since then they have dropped back.
The effective interest rate on the 10-year German government bonds has just reached a new low this year--many mortgage rates are derived from this rate (count on paying at least 1 percent more than the government):
As we said in our earlier contributions: the uncertainty of the trade wars between US and China, the worries about Italy and the Brexit, would keep the market from staging such a rally. But we were worried about surprises.
The big news for us was actually the lack of the news: the decision by the US not to discuss the trade issues in earnest with their Chinese counterparts until after the mid-term elections. This has profound implications: with a shift to the democrats Trump may have a very hard time to get any trade deal with China approved, even if he is able to strike one. Our Washington DC connections suggest it may take an awfully long time to resolve the trade war.
In other words this uncertainty will hang over the market for quite some time and will keep businesses from investing. The good news for you: low mortgage rates are here to stay for a while.
The bottom line for you: house prices are likely to keep chugging upward, although perhaps a little more slowly, while interest rates remain low. So strike the iron while it is hot; keep looking for your ideal house investment!
1/ Such as the slope of the yield curve (a plot of effective interest rates by maturity) which is recognized as the best indicators of a recession in the US. If the curve slopes down instead of up it indicates the possibility of a recessions. See for example: https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth.aspx