Low interest rate phase - What does this mean for investors

The cause: The ECB's zero-interest rate policy

Interest is of course not generated in a vacuum. In the European Union, the interest rate of the European Central Bank (ECB) for the main refinancing transaction is the decisive factor. This is the ECB's most important key interest rate, through which commercial banks primarily refinance themselves. The level of this interest rate in turn influences the general interest rate level in the European Union. In October 2000, for example, it was 4.75 percent. Accordingly, investors were able to look forward to a high savings interest rate at this time. Since March 2016, however, it has remained constant at just 0 percent. In fact, this is therefore a zero-interest rate policy by the ECB, which can be explained, among other things, by the weakening economy in the Eurozone and the high indebtedness of many member states.
 

The result: investment crisis for investors

For borrowers, the European Central Bank's zero-interest rate policy is good news. Because low key interest rates also mean low loan interest rates and therefore cheaper loans. Investors, on the other hand, are losing out because the low key interest rate level leads to very modest investment interest rates. The interest rate is so low that investing in traditional interest securities is generally no longer a good option today. But when a once very popular asset class virtually disappears, this literally means an investment crisis for some investors; especially since inflation in April 2019 stood at just 2.0 percent compared to the previous year. Anyone who earns a return of less than 2.0 percent loses — in real terms — money (worth).
 

One solution: Investing in real estate

Of course, there are alternatives to investing in interest securities. The first thing that many people think of here is equities or equity funds. In fact, high returns can be achieved with an investment here. However, the risks and fluctuations here are also often quite high. Anyone who took a look at their portfolio and its dwindling valuation during the last financial crisis can probably sing a song about it. Equities and equity funds are therefore suitable as a deposit supplement for risk-taking investors. However, investing a large part of your wealth here does not seem to be a good idea.

Is there an investment option that is not as risky but also offers high returns? They exist, as shown by an extensive study by financial economists Òscar Jordà, Moritz Schularick, Alan M. Taylor and Katharina Knoll. These economists have taken the trouble to study the performance of four asset classes — namely stocks, bonds, bank deposits, and residential real estate — in sixteen industrialized countries from 1870 to 2015. While bank deposits performed the worst with annual returns of 0.3 and 1.46 percent, the residential property yield of 8.7 percent per year was even better than the share return of 7.8 percent. Even though equities were somewhat ahead of the pack in residential real estate in the period from 1950 to 2015 at 9.59 percent compared to 8.3 percent, residential properties are obviously a really good choice when it comes to return and risk.
 

Is a real estate bubble looming?

However, some investors shy away from investing in real estate and justify this with a supposed real estate bubble. They therefore fear that the valuation of real estate is already too high and that there is a risk of a massive loss in value. Even though some voices have been stressing this aspect for years, the risk for the German market — according to the renowned German Institute for Economic Research — is rather low. As a justification, the experts point to the “comparatively low private debt in this country and the solid financing of real estate purchases.” According to economists, even the increased valuation of real estate in individual major cities such as Berlin, Hamburg or Munich “does not necessarily mean that developments nationwide would be questionable. ”