What the central banks giveth to landlords, they taketh from renters.
The front and center Wall Street Journal Europe edition today featured a story about new changes set to take place for residential real estate in Berlin, Germany in response to raging housing prices leaving behind a populace of renters.
Real estate prices in Berlin, Germany have skyrocketed by 21% y/y in a city dominated by 84% renters. Germany’s overall CPI is running decidedly north of the “close but below” 2% ECB target, with food inflation of 3.4% y/y and producer prices jumping by 2.7% y/y from 2% the prior month. The ECB has provided forward guidance for no interest rate rises until “at least through summer” of 2019. The metropolitan area with the fastest appreciating real estate market in the world has a central bank operating depressionary depths-of-crisis monetary policy.
A backlash to the increasingly unaffordable spike in real estate prices has already begun–in this case by a local coalition of politically left municipal government leaders in Berlin. Of course, as is often the case, the public perception is likely after the wrong scapegoats with the wrong solutions. Rather than incentivizing an increase in the local supply of housing, or shining a light on the downside of activist central banks fueling wealth disparity and asset bubbles, the city will engage in heavy-handed intervention, aimed at reducing private ownership of dwellings and in many cases the ability of property owners to conduct even simple renovations due to the risk it could increase rents in the future.
While these interventions are a far cry from what would be economically ideal long-term, local authorities likely feel relatively powerless for impacting central bank policy, or even boosting housing supply in a meaningful way which doesn’t lose sight of “Old World” architectural design standards.
I believe the greatest damage inflicted by activist Keynesian central planners in the post-crisis era will be reflected primarily by a severely damaged social contract and the political aftermath it creates. Governments and central banks largely traded the difficult political ramifications inherent in enacting lasting structural changes for “temporary” quick fix stimulus gimmicks stacked one after the other. Why bother stomaching leafy green vegetables and phytonutrients for healthy energy tomorrow when you can down a 5-Hour Energy right now and get lauded a hero in the public eye for “solving” a low energy problem?
The reemergence of populism witnessed in recent years, which Assist FX predicted, is going to continue and accelerate. Very few, if any, truly understand modern monetary economics, but anybody can see how it impacts a society to have the cost of life’s most essential purchases rise far more than the median worker’s wages over time, while the riches of a narrow percentage of society climb to unprecedented levels. Toss in the hat some contentious immigration factors, and the classic response is populism.
Historically speaking, populist governments are virtually 100% guaranteed to result in one thing: high(er) inflation.
Globalism is deflationary. Populism is inflationary. We are transitioning, slowly but surely, from the first to the second. Demographic “headwinds,” meet populist hurricanes. It’s going to continue to happen and it’s going to impact markets bigly. Be prepared.