Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1% — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe.
In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.
“The risks are real, because negative interest rates in Europe are cemented,” Mr. Krämer said. “What’s important for the economy as a whole is to prevent the emergence of a dangerous new bubble.”
Demand has surged in the five years since the European Central Bank pushed one of its benchmark interest rates below zero, a step never before tried on such a scale. Prices jumped at least 30% in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40% in Portugal, Luxembourg, Slovakia and Ireland.
While low rates helped produce a rebound in the eurozone, economists say the policies now appear to be doing more harm than good, clouding the bank’s efforts to reverse inequality. They have not resolved fundamental problems like weak business investment. Nor have they revived inflation — which helps lift wages — anywhere but in the housing market.
The Bundesbank, Germany’s central bank, said recently that real estate in German cities had been overvalued by 15 to 30% — in other words, that there is a bubble. The UBS survey cited Munich, Frankfurt, Amsterdam and Paris as cities at risk. And a study by the global accounting firm Deloitte & Touche cautioned that average house prices “will exceed pre-crisis levels” if the European Central Bank keeps interest rates at zero, as planned.
Housing prices have risen sharply in the United States as well. But there, the boom has been driven by individual buyers, household debt has been held in check and lending standards have remained relatively tight — all factors that reduce the chance of another collapse. Moreover, while benchmark interest rates in the United States have been kept low, they were never negative — and have now been above zero for several years.
The scarcity of affordable housing is fueling resentment and political strife. In Madrid and Barcelona, home prices have jumped more than 30% since 2016, pushing rents up as landlords sought bigger returns. Prime Minister Pedro Sánchez capped rents in Spain this summer at the rate of inflation, now 0.4%, limiting income for property owners.
In Paris, where 70% of residents are renters, Mayor Anne Hidalgo imposed new rent controls. While rents are limited by strict housing regulations, they have risen 40% between 2000 and 2018. As property prices keep climbing — they recently broke a record of 10,000 euros on average per square meter, or about $1,000 per square foot, one of the highest prices in Europe — Ms. Hidalgo is taking other steps to prevent the city from becoming a “ghetto for the rich.” Her plans include building subsidized housing that families with modest incomes can purchase at half the market rate.
Few places have felt the impact as sharply as Berlin. Since the fall of the Berlin Wall 30 years ago, workers, artists and students have increasingly been displaced by an influx of young professionals with families. But property prices and rents have skyrocketed in recent years as home buyers and investors double down.
The city imposed a five-year rent freeze, the toughest in Europe, in the summer after rents jumped more than 50% in five years, and gave tenants the right to demand reductions if rents go too high. German real estate stocks have slumped since the ruling.
In Denmark, which is not part of the euro but closely tracks E.C.B. monetary policy, benchmark interest rates have been negative for seven years. Seeking greater returns, some Danish pension funds are buying large holdings of prime real estate and new buildings to offer for rent. But rents have grown so high that the city is considering capping them, which could cut into those investments.
At the same time, rates are so low that bargains being offered by banks are hard to pass up. In August, Jyske Bank of Denmark began offering 10-year fixed-rate mortgages at negative 0.5% interest before fees, meaning the amount outstanding on the loan will be reduced each month by more than the borrower has paid. Nordea Bank is offering 20-year loans at zero interest.