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Germany's house price rises continue

Last Updated: October 18, 2011

House prices in Germany have risen, though economic growth is easing:

  • The overall house price index for apartments rose by 4.3% during the year to August 2011 (1.85% in real terms), its highest increase since 2006. 
  • The average price of new detached houses was up by 2.8% to €238,484 (0.39% in real terms) from a year earlier.
  • The average price of existing homes was down by 1.3% to €174,707 (-3.61% in real terms).

Another indicator, the hedonic price index rose 2.0% y-o-y to August 2011 (-0.42% in real terms) according to Hypoport AG.

Germany house price change

Like many other EU countries, in 2009, Germany’s GDP took a 5% nosedive, hitting the housing market. New home prices dropped 3.1% during the year  to June 2009, while the average price of apartments dropped 5.1% y-o-y to May 2009. Existing home prices experienced particularly sharp declines, with falls of 12.1% y-o-y to April 2009.

Yet so far this year, German house prices have been unaffected by the economic slowdown.

Has housing demand been boosted by Germany’s strong recovery from the 2009 recession, by its 3.6% GDP growth in 2010?  A boost from the strongest economic growth since reunification can’t be ruled out.  But perhaps something else is happening?

 

Perhaps the long period of over-supply is coming to en and.  Rental yields are rising in Germany’s prosperous western cities.  Huge new demand is forecast. Yet completions are flat. Financing for new building has not caught up.

Whether or not the Germany’s market is turning, two other things seem likely:

  • The west will continue to do better than the east
  • New family homes will do better than old apartments.

Recovery from the unification hangover?

Is something stirring in the Germany property market?   Is the hangover from the unification binge, during which surplus house-building was encouraged by market-distorting incentives, coming to an end?

Germany outstanding housing loans graph

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.

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.

In 2010 dwellings completions were 72.61% down on the peak year, 1995.

Germany’ mortgage market has reflected this.  As a percentage of GDP, outstanding housing loans rose from 30% in 1991 to 50% in 2000.  By 2010, they were back to 44% of GDP.

Rental yields are rising

Germany rents versus prices graph

The good news is that rent increases have outpaced real estate prices since 2000.  Rents for existing contracts rose 12.8% between 2000 and 2010, while rents for new contracts rose 13.5%. Over the same period, house prices rose less. The average price of owner-occupied houses rose 10.9%, while the average price of terraced houses fell by 3.2%.

Germany average rent graph
  • In Berlin, rental yields range from 3.73% - 4.10% for 75 – 160 sq. m. flats, while bigger units (200 sq. m. – 300 sq. m.) have yields of 4.07% to 4.22%, according to Global Property Guide research.
  • In Frankfurt, rental yields are at 4.91% - 6.44% for 35 sq. m – 80 sq. m units, again more  than bigger units, at 3.97% - 4.33%.
  • Munich flats have generally lower yields, at 3.07% to 4.33%, again with smaller units earning the highest returns. 

East is bad, west is good

Germany dwellings completed graph

There is a huge economic gap between the east and the west. Unemployment in Germany, which was 7% in 2010, is concentrated in the east, and in the older industrial areas of the west. Salary levels in the east are only 78% of those in the west.

So housing demand is much higher in the west, while there are a large number of empty and poor quality properties in the east .

Germany’s declining and ageing population is hardly positive for the housing market.  But the shrinking and ageing has been balanced by a rise in the number of households since German reunification – up by 5 million households.

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.  Around 1.6 million people have already relocated from east to west since 1990 for better job opportunities:

  • Ten Neue Bundesländer regions are expected to see static household growth, while 13 regions will experience falls.
  • Yet in prosperous West Germany, only 3 out of 74 regions are expected to see a decline in households.

Single-family homes are the future

There will also be a shift away from apartments, towards single and two-family houses (duplexes) in the next 15 years, according to the research firm Empirica. 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 unusual housing market

Germany housing loans

Most Germans live in rented accommodation. The proportion of renters to total households, at 55% in 2004, is among the highest in the world. Private landlords own about 46% of the housing stock, social housing is around 6%, and co-operative rentals are around 6%. Owner-occupation has been falling slightly from 43% in 2002, to 42% in 2006, due to potential capital losses from purchasing,

Germany housing loans and interest rates graph

Home-buyers in Germany mostly borrow at a fixed rate. An average of 71% of new loans approved from 2003 to 2010 had an initial rate fixation (IRF) of 5 years or more. Loans with IRF of up to one year have never exceeded 20% of new loans approved.

Loan rates on interest rate fixations (IRFs) of 5 years or more have generally fluctuated between 3.8% and 5.2%.

Housing loan rates as of August 2011 are as follows:

  • IRF: up to 1 yr – 3.89%
  • IRF: 1-5 yrs – 3.69%
  • IRF: 5-10 yrs – 4.01%
  • IRF: 10 yrs or more – 4.13%.

Relative stable interest rates, with rate changes affecting only a low proportion of borrowers, are key to Germany’s house price stability.

Germany and the bailout

Germany gdp growth graph

Germany, being Europe’s economic powerhouse, is currently playing a crucial role in the sovereign debt crisis in Europe.

Germany is in a difficult position.  The economic turmoil in EU is sure to affect Germany’s exports, as the EU accounts for almost two-thirds of German exports, more than 40% of the total going into the eurozone.  German banks are major creditors of the vulnerable economies.

So while Germany has resisted aiding its less-disciplined neighbors, as the crisis has continued it has progressively given in to pressure, approving a €22.4 billion contribution to bail out Greece in May 2010.  In September 2011, Chancellor Merkel won the backing of German lawmakers to expand the €440 billion European Financial Stability Facility (ESEF) bailout fund.

                       

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