German Olympians have not quite found their groove in Rio. Germany is yet to reach double figures in the medals table and therefore has quite a way to go if it hopes to match its sporting achievements of the past.
By comparison, after many years of decline, the current mood in the domestic property market can almost be considered record-breaking. This is reflected in the property price index for the second quarter that has been released by the Association of German Pfandbrief Banks (vdp). This reports a year-on-year increase of 6.3% in the vdp price index for owner-occupied housing, which is the strongest improvement since the index was first compiled in 2003. Even greater growth of 7.3% was recorded for condominiums, while the rise for single-family and semi-detached houses was slightly lower, at 5.9%. Overall, price rises are therefore considerably higher than at any point in the recent past, moving within a range of between 4% and 5% since 2014. This strong growth trend in residential property prices has to a great extent closed the gap against the commercial segment of the property market, which has been recording price rises of between 7% and 8% for the past two years. The price rise was in effect almost the same when looking at the most comparable property types in both segments, namely owner-occupied condominiums and rental flats in multi-family houses. However, this was in part attributable to the fact that the already high rate of growth in rented-out multi-family houses did not increase further. In contrast to owner-occupied property, the price index here only amounted to 7.5%, which does not represent a significant year-on-year improvement.
The price growth in owner-occupied condominiums has accelerated again despite the already high level in the metropolitan areas, which comprises the seven largest German cities of Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart. According to price statistics provided by bulwiengesa, after slowing to around 5% per year in 2015, the annual price rise more than doubled by mid-2016 and is therefore only slightly lower than the double-digit price growth that had been recorded in these cities in 2012. The Bavarian capital of Munich achieved by far the highest price level, with one square metre in a new build property costing an average of EUR 7,000. This represents a two-fold increase on the rate reported in 2004. In the other six cities, the price per square metre is around one third lower, at between EUR 4,000 and EUR 5,000. The price rise over the same period is also significant, at between 60% and 70%, albeit not quite as substantial by comparison. In Germany as a whole, prices for condominiums have increased by a little less than 40% since 2004, while single-family house prices were up by just over 30% in the same period.
What are the reasons for this acceleration in the price trend for owner-occupied homes? After all, there has been no fundamental change in the strong economic situation in Germany, the high level of employment, the positive income development, net migration to the cities or low interest rates. The consumer credit directive relating to mortgages that came into effect in March set higher minimum requirements for mortgage lending, which would in fact be expected to lead to a slowdown in price rises. The same applies to the increased new construction figures, although there continues to be a shortfall in the supply of residential property. Two driving forces can be identified as factors contributing to price growth being stronger than before, despite the negative influences. The first factor is the further deterioration in the outlook for private investment. In the wake of negative interest rates being offered to banks by the European Central Bank (ECB), the expectation is mounting that the banks will pass these negative rates on to customers in the private banking segment. It is highly probable that this will provide an added boost to interest in alternative investment options. A second reason is the growing uncertainty that has arisen in relation to the many international crises and the emerging concerns of increased centrifugal forces within the EU following the vote in favour of Brexit by the UK. Investment in “concrete gold” is benefiting from the above factors, as it is considered to be a more secure and crisis-resistant asset.
However, it remains to be seen how long this strong rate of price growth can be maintained. It is true that the valuation ratios have continued to deteriorate. For example, property prices are rising at a considerably faster rate than rental prices. Furthermore, the rapid price growth in turn raises the risk of a correction, although there is currently little evidence to suggest a price decline is imminent. The extremely low interest rates are greatly reducing the financial pressure associated with buying a property when compared with the past. For this reason, buying is often more affordable than renting, especially as the supply of desirable flats to rent is rather low. The same applies to appealing investment opportunities. Consequently, buying demand for properties is likely to remain strong for the purpose of housing requirements and financial investment. The moderate debt levels of private households are helping to mitigate risk, as is the watchful eye that is being cast on developments in the property markets by financial authorities, among others.
On the whole, the risks have increased substantially, but a significant correction is not to be expected for the time being in the German property market. However, a notable price adjustment is likely in the medium term as property prices are shifting ever further from a fundamentally justifiable price level.