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Germany’s house price rises decelerating, amidst economic slowdown

Last Updated: August 09, 2012

 Germany house price change

Germany’s property price increases are now decelerating, amidst an economic slowdown.

In the second quarter of 2012, the hedonic house price index dropped by 2.65% (-2.56% in real terms) from the previous quarter, after registering a quarterly rise of 2.8% in Q3 2011, 2.7% in Q4 2011, and 3.9% in Q1 2012.

In June 2012:

  • The average apartment price fell 1.74% (-1.65% in real terms) q-o-q
  • The average price of new detached houses fell 0.28% (-0.19% in real terms) q-o-q
  • The average price of existing homes rose 3.94% (3.85% in real terms) q-o-q

During the year to end-June 2012, the overall house price index rose 6.7% (4.9% in real terms), based on figures released by Europace.

The average price of apartments was €149,700 in June 2012. The average price of new detached homes was €250,600, existing homes €192,950.

Property prices in Germany risen modestly the past two years, with the overall house price index rising by 5.44% (3.27% in real terms) in 2011, and 2.97% (1.28% in real terms) in 2010.

Total dwelling permits rose 21.7% to 228,400 units in 2011, according to Federal Statistical office (Destatis). In addition, completions rose 14.6% to 183,000 units.

Germany’s economy expanded by a healthy 3% in 2011, after GDP growth of 3.6% in 2010. But economic growth is expected to slow to 0.6% in 2012 according to the IMF, and real GDP grew by just 0.5% in Q1 2012 q-o-q, according to the Federal Statistics Office. Compared with the previous year, the economy expanded by 1.7% in Q1 2012.

In July 2012, Moody’s put Germany on a negative sovereign credit outlook, mainly due to the burden the country will have to bear to keep the currency bloc together amidst the ongoing debt crisis.

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.

Housing supply

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.

Germany outstanding housing loans graph

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.

Economic slowdown

After contracting by 5.1% in 2009, the German economy bounced back quickly with 3.6% growth in 2010, its fastest growth since reunification in 1990, and by a healthy 3% in 2011, due to export recovery and increased domestic demand.

Germany GDP inflation

However, real GDP grew by just 0.5% in Q1 2012 from the previous quarter, due to weak euro area demand for German products, according to the Federal Statistics Office. Compared with the previous year, the economy expanded by 1.7% in Q1 2012.

Economic turmoil in EU, which accounts for almost two-thirds of German exports, and more than 40% into the eurozone, has been adversely impacting Germany.

The country’s jobless rate rose for the fourth consecutive month this year to 6.8% in June 2012, as the debt crisis in the region weighed on companies’ willingness to create jobs, according to the Federal Labor Agency.

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

As risks from within the eurozone have steadily accumulated, Moody’s put Germany on a negative sovereign credit outlook in July 2012.

In an effort to boost economies in the region, the ECB slashed its key rate to a historical low of 0.75% by early-July 2012. Inflationary pressures are expected to remain subdued over the medium term.  In June 2012, Germany’s annual inflation fell to 1.7%, its lowest rate since December 2010, according to the Federal Statistics Office.


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