Feb. 25, 2017 (Commerzbank AG) – Germany – Housing overpriced but boom continues
House prices in Germany keep on rising. According to our new model, they are now overpriced by around 10%. Only a marked rise in interest rates would be likely to end this boom and such a move is nowhere in sight. House prices should therefore continue to climb for the time being. This does not pose a great danger for the economy at present as the building sector is not yet over-inflated and the rise in private debt has been limited so far. However, the longer the boom lasts, the greater the risk that major imbalances will emerge whose correction would hit the German economy hard.
Outlook for the week of 27 February to 3 March 2017
- Economic data: Euro zone inflation in February may well see a two before the decimal point for the first time in four years. While this could drive inflation expectations further up, it is likely that the inflation rate will soon fall again as underlying inflation pressure remains weak.
- Bond market: The long-end of the curve is increasingly impacted by the Bundesbank’s sizeable €QE purchases in the one-year maturity sector. Moreover, investors remain nervous regarding political risks in France and Italy, while ample redemptions need to be reinvested. We therefore continue to expect Bund yields to trend downward amid a steeper curve.
- FX market: Strong support in polls for the eurosceptic French presidential candidate Marine Le Pen continues to weigh on the euro. Speculation that strong US inflation will prompt higher rates continues to support the USD.
- Equity market: High DAX valuations, notably inflated P/B ratios, have increased the importance of selective stock-picking. We favour companies with credible restructuring plans; that have a high share of sales in the USA and whose earnings react positively to a stronger dollar.
- Commodity market: In the week ahead, the price of a barrel of Brent oil should remain range-bound around USD 55. Survey-based estimates of OPEC production are expected to confirm that the agreed output cuts have been largely implemented. Further support should come from upbeat sentiment indicators.