No threat of a property price bubble in Germany

Manfred Binsfeld from Feri EuroRating Services, a Scope Group company, wrote in the Borsen Zeitung that price rises are only one of a number of factors that can contribute to an asset price bubble in Germany.

In relation to the property markets, he suggested that it makes far more sense to consider both the relationship between property prices and rents on the one hand, and rents and wages on the other. As he observed, it is not just rents that are increasing in Germany, wages are on the rise too, which means that households are typically paying between 15 and 30% of their incomes on their housing.

Binsfeld also identified stable overall economic growth in Germany, and highlighted the fact that prices are increasing organically. A similar pattern emerges when one considers levels of household indebtedness. In terms of GDP, Germany has much lower levels of household debt than many other European countries. Whereas household debt amounts to 120% of Denmark’s GDP, Germany registers a level of less than 60%.

A particular characteristic of Germany’s property price boom is that it was barely affected by the financial crisis and that the house price increases only really gathered steam from 2010 onwards. This shows that potential volatility is far lower in Germany’s property markets, as prices have developed relatively independently of capital market developments. A further key factor identified by Bindsfeld is construction activity. No one could talk of excessive construction of housing in Germany, which would be symptomatic of a property price bubble developing.

Nevertheless, he does concede that much of the new housing that has been developed in the country has not been effectively targeted at satisfying existing demand. New apartments are often built in the wrong locations, or not designed with modern housing needs in mind.

The biggest problem in Germany’s largest cities, however, is a shortage of suitable housing. He concedes that this has led to localised overheating, but believes that this is limited to a small number of inner-city hotspots.

For a majority of German cities and regions, he observes, price rises should not be viewed as a sign of an asset price bubble forming as they are solely being driven by an imbalance between supply and demand. Rather than too much new housing being built, the issue is that too little new housing is being developed.

Cologne’s Institute of the German Economy (IW) confirms this assessment, according to a report in Die Weltam Sonntag. A long-term analysis of property prices, mortgages and loans, incomes and economic growth shows that residential property prices are actually rising and that the credit volume of EUR 15 bln at the end of 2014 has risen to just under EUR 20 bln (with a moderate decline in H2 2016). Nevertheless, taking both developments together, the situation, according to the IW, looks entirely normal.

Meanwhile, the analysts of CBRE, Dr. Lubke & Kelber and BNP Paribas Real Estate (BNPPRE) have reported total residential investment market transaction volumes of between EUR 13.5 bln and 13.8 bln for 2016, according to the Immobilien Zeitung. Savills put the figure at EUR 10.7 bln.

Forecasts for 2017 are in line with the 2016 figures. Savills predicts a transaction volume of EUR 10 bln, while CBRE expects around EUR 13 bln. Above all, Q4 2016 was an incredibly strong quarter, with CBRE’s analysts registering transactions totalling EUR 6.3 bln.

Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne and Munich accounted for 42% of the total investment market. Whereas the number of existing buildings coming to market declined, there was a significant rise in project developments.

According to Savills, 21% of the transaction volume can be attributed to the acquisition of project developments. The average condominium sale price according to Dr. Lubke & Kelber was around EUR 97,000 (up 49% in comparison with 2015).

Changes in the product coming to market also had an impact on the buyer side. Savills identified special funds as the most active investors, accounting for 32% of the transaction volume, followed by housing companies at 11% and insurance/pension funds at 5%.

CBRE’s analysis also registers increased interest among international investors. Their market share rose from 15% in 2015 to 30% in 2016.