In April 2014, the German hedonic house price index rose by only 1.9% y-o-y (0.6% in real terms), a slowdown as compared to the 4.8% growth in March, 5.4% in February, and 6.1% in January 2014. Back in September, Germany posted double digit y-o-y house price rises of 11.2%, based on the Europace figures.
Hedonic indices attempt to compare like-for-like exactly, so should be a better measure of house price trends than other indices.
Based on Dr. Klein’s trend indicator of property prices (DTI), house prices in the West and North-East regions were stabilizing during the first quarter of 2014.
In North-East Germany:
In West Germany:
In South Germany:
Total dwelling permits rose 12.9% to 270,364 in 2013, according to Federal Statistical Office (Destatis). The increase of dwelling permits was higher than the 4.9% growth recorded in 2012. During the same year, dwelling completions were 9.5% higher than in 2011, at around 200,466 units.
The recent slowdown can be attributed to tighter lending standards implemented in the latter part of 2013. House purchase loans rose by only 2.3% y-o-y to October 2013, according to the Standard and Poor’s (S&P).
Although S&P predicts continuous appreciation of residential real estate prices in Germany over the next two years, house price growth is expected to slightly decelerate from S&P’s 5% price increase estimate in 2013 to 4% in 2014 and 3.5% in 2015. Even though S&P expects stronger economy in 2014, higher returns on alternative investments are expected to make real estate investment less attractive in Germany.
After being severely affected by the recession in 2009, Germany’s housing market recovered, with apartment prices increase on average by 2.5% from 2010 to 2011.
House prices recorded even stronger growth in 2012 with an average price rise of 5.8%.
According to Standard and Poor’s, some factors contributed to the surge in demand and consequent development of housing supply in 2013:
According to Sascha Wilhelm, Corestate Capital Advisors’ managing director, the recent price hikes are part of an ‘adjustment’ phase in the markets: “Between 1995 and 2008 property prices were falling in Germany, and they are now just coming back from 2008 levels. This is not a bubble, it’s an adjustment to a normal pricing level. The prices are rising by two to three percent; this is still really stable compared to bubbles in Ireland and Spain,” said Wilhelm at the September 2013 PropertyEU German Investment Briefing.
After more than two decades of Germany’s reunification, an economic gap between the east and the west remains apparent.
Unemployment in Germany (5.3% in April 2014), is more concentrated in the communist east than in the west. A wage gap also persists. According to Deutsche Bank research, the gap in state sector wages between east and west was only around 10% in 2011, but private-sector wages have converged at a much slower pace. From a wage gap of 50% in 1992, the gap is still 30%.
East Germany is also older. In eastern regions, the proportion of inhabitants aged over-65 ranges from 22.1% to 25%, while the proportion in the west ranges from 19.4% to 22.1%.
Germany’s declining and ageing population is hardly positive for the housing market. The number of households is projected to rise 7% in west Germany over the next 15 years, but only 2.4% in east Germany, according to Deutsche Bank research.
The research firm Empirca predicts that there will be a shift from apartments towards single and two-family houses. By 2020, an additional 1.5 million single-family houses are projected to be needed in the west, while only 500,000 units will be added in the east.
Germany’s mortgage market has been experiencing sluggish growth since 2000. As a percentage of GDP, outstanding housing loans rose from 30% of GDP in 1991 to 50% of GDP during 1999 to 2003. However, as of 2013, loans had fallen back to about 42% of GDP.
Home-buyers in Germany mostly borrow at a fixed rate. During 2003 to 2013, an average of about 68% of the new loans approved had an initial rate fixation (IRF) of 5 years or more, while loans with IRF of up to one year have never exceeded 20% of new loans approved.
In 2013, loans with IRF of up to one year were only 15% of total loans approved. This interest rate profile gives considerable stability to the German housing market, which tends not to suffer from the sudden lurches in rates, or in the value of houses.
When the ECB cut its key interest rates from 4.25% in September 2008 to 1% in May 2009, housing loan rates on IRF of 5 years or more only fell from 5.17% to 4.35%. Loan rates did fall further to 3.58% in October 2010, as ECB maintained its 1% key rate. It is only since the ECB implemented its 0.75% base rate in July 2012 that housing loan rates in Germany have been below 3%.
After implementing the 0.75% base rate, the ECB implemented three more rate cuts from 0.5% in May 2013 to 0.15% in June 2014. The recent base rate cut was included to ECB’s line up of measures in fighting low inflation (Euro area’s inflation rate is about 0.5% in May 2014) and boosting euro zone’s economic growth. Other measures include lower interest rate on deposit facility from 0% to -0.1% and a 35 basis points reduction on the marginal lending rate to 0.40%.
Housing loan rates in April 2014 are as follows:
Since the mid-1990s there has been a substantial drop in housing completions, in part caused by policy changes such as a rise in VAT from 3% to 19% in 2007, and the abolition of owner purchase subsidies. In 2012, dwelling completions rose by 9.5% from the previous year to 200,466 units. However, this is still 65.7% below from the peak of 583,517 new units recorded in 1995. Dwelling permits in Germany rose by 12.9% to 270,364 in 2013, a 10-year high since 2003. As of Q1 2014, permits were at around 87,663.
After Germany’s re-unification in 1990, the Neue Bundesländer (New Federal Countries) and East Berlin saw much new residential building. A major incentive was tax write-offs for the construction of large-scale rental dwellings. Completions rose from 257,000 units in 1990, to an average of 500,000 units between 1995 and 2000. Unfortunately, many of these investments turned bad. Whole buildings stood empty for long periods.
Most Germans live in rented accommodation. Owner-occupation fell slightly from 43% in 2002, to 42% in 2006. Homeownership rose to 44.2% in 2010, and went back to 43% in 2013, according to Federal Statistical Office (Destatis). The proportion of renters to total households is among the highest in the world. And much of this is in the hands of private landlords (36% of the housing stock). Social housing is around 5% of the total, and co-operative rentals are around 5%.
Rent increases have outpaced real estate prices since 2000, leading to slightly higher yields. Rental yields on smaller flats are generally higher than bigger units, according to Global Property Guide research in May 2013.
Rents for existing contracts rose by 27.3% from 2000 to 2013, while rents for new contracts rose by 32.3%. On the average, house prices rose less over the same period. The average price of owner-occupied houses rose by 37.4%, however, the price of terraced houses rose by only 17.3%.
Germany’s economy slowed further in 2013, growing by only 0.5%, following the sharp slowdown in 2012, with GDP growth only 0.9%.
However in the first quarter of 2014, German economy exhibited its fastest growth in three years, as GDP rose by 0.8% from the previous quarter. Domestic demand and private consumption added 1.7 and 0.4 percentage points, respectively, to GDP in Q1 2014. Plant and equipment investment as well as construction investment also had their strongest levels in three years posting 3.3% and 3.6% growth rates, respectively. As compared to the previous year, GDP expanded by 2.5%.
Deutsche Bundesbank, Germany’s central bank, recently raised its 2014 growth forecast to 1.9%.
“Germany’s strengthened domestic economy as well as the ongoing improvement in the economic situation of the industrial countries and the gradual recovery of the euro area suggests that Germany will follow a robust growth path,” said Bundesbank president Jens Weidmann.
Germany’s unemployment rate was 5.4% in April 2014, or 2.3 million, in contrast to the euro area’s unemployment rate of around 11.7%.
In May 2014, Germany’s annual inflation rate reached its four-year low, rising by only 0.9% as compared to the previous year, according to Federal Statistical Office (Destatis). Recently, Bundesbank slashed its inflation forecast for 2014 from 1.3% to 1.1%. In June 2014, the ECB to cut its benchmark interest rate to 0.15%.
The Christian Democratic Union (CDU) and its sister party Christian Social Union (CSU), led by Chancellor Angela Merkel, won almost 42% of the vote and secured 311 seats in the cabinet in the September 2013 German federal elections. Merkel is Germany’s third postwar chancellor to win three elections, and the only euro zone leader re-elected since the 2010 euro crisis.
However, CDU’s preferred coalition partner Free Democrats (FDP) got less than 5% of the vote, and were denied seats in the Bundestag. This prompted the CDU to make a coalition agreement with the Social Democrats (SPD), forming a grand coalition.
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