There are a lot of things wrong with the
, but one of the main problems is the concept that one
type of economy fits twenty odd different countries. Anyone
with a modicum of common sense will realise that you can't
squeeze twenty countries into one economic system.
In the recent past you had low interest rates across the
currency zone which led to painful boom and bust situations in
Ireland, Spain, and Portugal. All those countries needed
higher interest rates. Germany
, on the other hand, was
going through a rough patch after having absorbed East
Germany. They wanted lower rates. Germany had more clout; they
got their lower rates.
Now things are the other way round. Germany
and could do with higher interest rates, while Spain,
Portugal, Italy and Greece, and probably other countries as
well, could do with leaving rates on the floor.
It's a recipe for long term disaster. But it is also a recipe
Let's have a look at a few basic facts and then try to draw
The idea of monetary policy is to smooth the business cycle.
If the economy is week it can be given a kick-start with lower
borrowing costs. Booms can be slowed by having a tighter
policy with higher interest rates. The trouble is, if
twenty-odd countries all have independent cycles, they are
going to be at different stages in the cycle, and therefore a
common interest rate for them all will probably mean that not
a single economy is functioning on the optimum rate at any
It isn't much good to set an average rate. This pleases
no-one. In fact, the way things are, the whole area can never
be happy at the same time.
The ECB can't raise interest rates at the moment for fear of
making things even worse for Italy and Greece, and probably
Spain as well, so rates remain low. On the other hand, Germany's
is on a tear, and the rates should be much
higher there. Instead, the country is booming, and the
country's property market is booming too.
The interesting question posed in an article I recently read
was: what would happen if the German property market
caught up with US prices, or even UK prices?
The figures came out like this. For a US price equivalence,
€24 trillion extra wealth would be created. That is a huge
increase. The figure is almost off the scale for a UK
equivalence: up by €73 trillion.
So far, prices in Germany are rising. The housing market is at
the beginning of a boom, and this is going to lead to a great
increase in the wealth of those holding real estate.
If we look at a chart of a selection of house prices over the
last few decades we can see that the German market has hardly
moved. Of course, maybe it never will, but if it does, it has
a heck of a lot of catching up to do.
Germany's home ownership rate is way down the list as well at
just over 43%. The UK level is a tad over 71%.
According to a report from property consultancy Knight Frank,
property prices in Berlin soared
by nearly 21% last year,
putting it the top of the 150 world cites it surveyed. The
German cities of Hamburg, Munich, and Frankfurt all
experienced price growth of between 13 and 15% too, putting
them in the top 10.
The fact that residential property in Berlin
affordable compared to, say, New York or London, has
encouraged an influx of foreign investors— including Warren
Buffett, who last month inked a franchise deal with
Berlin-based luxury apartment company Rubina Real Estate.
Vacancy rates in German cities are absurdly low – near 0% for
Munich, Frankfurt and Hamburg according to Deutsche Bank.
Probably the easiest way into this market short of buying
property yourself would be to invest in a German REIT
Real estate investment trusts, or REITs, are a means of
gaining investment exposure to real estate without actually
going out and buying bricks and mortar.
A couple of year's ago I was going to recommend people buy
into a German company that buys up listed buildings in Berlin,
renovates them, and rents them out. It's doing well, but I am
not in the business of giving investment tips. All I will do
now is suggest it might be a good idea to check out some of
the German REITS. There are a couple listed on the London
Stock Exchange. You'd be buying for the boom, and maybe
getting out before the bust so you don't get stuck with the
underlying asset if it's value goes down again.
If you are buying into real estate for investment purposes
this is probably the least risky way in. But, as I said at the
beginning of this short series of blogs, when buying real
estate don't confuse matters. If you are going to buy for
yourself, you make the same decision abroad that you would
make in the UK. That first decision is based on carefully
thought out pros and cons concerning the suitability of the
property and place for your life style. As investment guru Bob
Beckman used to say: remember your home is your nest, not your