Easy Money Policies Risk Creating a Housing Bubble in Germany

April 26, 2012

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Hott and Jokipii found keeping interest rates two low, as measured by the Taylor rule, can explain up to 50% of the overvaluation of the property market in previous bubbles. ~ voxeu

Credit Suisse notes the Taylor rule (inflation and unemployment rate), indicates "peripheral Europe needs a policy rate of minus 6.5%, while Germany needs policy rates of 6%. Rates at current levels 1 .25% are equivalent to a 2% boost to German GDP growth, on the OECD Interlink model."

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"We believe Germany will likely continue to see a monetary policy that is too loose — and thus we continue to buy domestic Germany."

Real estate may be a better play. Economist Magazine shows German real estate is undervalued by several metrics. All this free money printed, then handed over to the banks, must find a home somewhere.

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