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German real estate market – Why German house prices rise, but no one sees a bubble News

Sunday, August 27th, 2017 | Economy

When Grit Hildebrandt finally found her dream home near Rostock after a three-year search, she had to add another ten percent to the offer price in order to put other interested parties out and win the contract. "It is an absolute sales market, and the owners know this too. In the end it was going to endure and develop the fighting spirit, "the 38-year-old bankwoman remembers her house acquisition 2015.
Just like Hildebrandt, it has happened to many Germans in recent years. However, most experts do not see a bubble.
Between the second quarter of 2012 and the second quarter of 2017 alone, German residential real estate rose by a total of 31.1 percent, according to statistics from the German Pfandbriefbank Association (VDP).
«Rising prices are not yet a bubble»
"In addition to low interest rates, the positive demographic trend, the ongoing urbanization trend, a higher level of employment as well as rising incomes continue to drive demand," says VDP spokeswoman Helga Bender.
For institutional investors, prices in Germany seem to have risen even more. The average purchase price per apartment for transactions involving at least 50 apartments doubled from 53,832 euros in 2012 to 101,457 euros in the first half of 2017. This is shown by data from the real estate service provider Savills. If only Berlin is considered, there is even an increase of 59,220 euros to 140,839 euros.
"Only rising prices do not represent a bubble as long as they fit into the fundamentals," explains Michael Voigtländer, Head of the Competence Area for Financial Markets and Real Estate Markets at the Institut der deutschen Wirtschaft Köln (IW), in an interview with Bloomberg. "We have stable financing with constant equity ratios. There is a lot to be done. And overall construction activity is rather moderate. "
No over-euphoria
Jürgen Michael Schick, President of the Real Estate Association IVD, who is represented by real estate consultants, brokers, administrators and experts, says: "It is not built on demand, which means that every residential property in Germany is immediately a buyer."
Matthias Pink, head of analysis at Savills in Germany, is of the opinion that there is no over-euphoria in the market, which also speaks against a bubble. "Hardly anyone buys an apartment in the expectation of being able to sell it again for much more money," he says.
In spite of the strong price dynamics, there is as yet no risk to financial stability, according to the latest report of the Committee on Financial Stability. This is made up of representatives of the Treasury, BaFin and the Bundesbank. The risk of price corrections and of defaults for residential real estate loans appears to be low, as banks have so far barely expanded their credit standards.
New Real Estate Law Against Bladder Formation
Andreas Dombret, a member of the Board of the Deutsche Bundesbank, is also cautious in his speech, which the Bundesbank published on its website and which bears the date of 28 June. He would not speak of a bubble in Germany, is to be read there. However, he was worried. Thus the price rise in large, but also in some middle German cities is now an exaggeration.
In order to be able to deal better with a possible bubble formation, the Grand Coalition had passed a new real estate law in the Bundestag at the end of March. In the case of signs of bubble formation, BaFin can therefore impose stricter conditions for banks to award new real estate loans, such as a so-called loan-to-value rate, which sets a ceiling for borrowed capital in real estate acquisitions. The Act entered into force on 10 June. The conditions are not yet effective. Only in the case of signs of bubble formation can the BaFin issue stricter credit requirements.
A segment in which Voigtländer of the IW sees a price correction risk are micro-apartments, ie typical student apartments. "In some big cities, a lot of it has been built. High rents are currently operating because of the scarce supply, but can not be sustained in the long run because the population between 18 and 25 years will decrease in the coming years, "he says. In the case of falling rents, a correction of the prices of these properties is possible.
Still air upwards at prices
Schick sees in rents a good indicator of the direction of real estate prices. He points out that more than half of the Germans still rent living space instead of owning it. "In some cities like Frankfurt, Düsseldorf and Stuttgart the rents have moved last sideways. What the rents today are the real estate prices tomorrow, "he says.
This does not mean, according to some experts, that the rise in property prices immediately comes to an abrupt end.
Voigtländer: "There is still air in the prices for residential property. People will increasingly migrate to the countryside where prices will rise faster. But they are likely to continue to grow in the cities, albeit less strongly. "
Hildebrandt, who had bought her property for her own supplies, did not regret her decision in the face of such prospects. She says: "The house purchase 2015 was the right thing, because the prices are even higher." According to VDP, prices for residential properties in Rostock have actually increased by a further 8 percent between 2015 and mid-2017.
(Bloomberg)

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