The East-West gap widens

Germany’s property markets remain much less vibrant than those in the rest of Europe. Prices for owner-occupied flats increased by a marginal 0.90% in nominal terms in 2007. However, in real terms, prices actually fell by 0.87% - a slightly worse performance than 2008.

Over five years the value of apartments in Germany has dropped 6.55% in real terms (a 1.34% increase in nominal terms). Prices are expected to continue to stagnate this year.

However, housing prices have risen significantly in many parts of West Germany, in the long term. Most price declines are in the former East Germany.

Observers are divided over whether the Germany economy is recovering. Corporate profitability has been growing strongly, apparently because companies have shifted much production to East Europe. But real incomes in Germany (as a whole) have not risen for years, depressing consumer spending and the economy in general.

Nevertheless, Germany’s unemployment rate has been falling significantly, and was 7.3% in March 2008 (the lowest rate since 1992), which compares with 7.8% in France, and 4.9% in the U.S.. German unemployment has now fallen for 26 months in a row.

Munich prices have been rising, and the city now has perhaps the highest per square metre apartment prices in Germany. Frankfurt is also in positive territory. Other interesting cities for investment are Hamburg, Essen, Cologne, Stuttgart, Berlin, and Hannover.

Most sought after are “Altbau”; buildings constructed at the beginning of last century and between 80-100 years old. If these houses are modernized, they are unique with their high ceiling levels at about 3.20 to 4.00 metres (buildings since about 1950 have ca. 2.50 metres room height).

However Germany’s housing market is not like the rest of Europe’s:

Fixed rate mortgages. The high proportion of fixed rate loans tend to make Germany’s residential property market extremely stable, and not subject to booms and busts.

Oversupply. Too much supply has been partly responsible for the stagnant real estate market. Tax write-offs for the construction of large-scale rental dwellings increased supply, keeping prices low. Between 1995 and 1997, about 560,000 dwellings were completed annually.

There was then a reduction; 216,000 dwellings were completed in 2003, another 239,000 units were completed in 2005, and 278,000 units in 2004.

An ageing population. A more serious long–term threat to the housing sector is the declining and ageing population. By 2030 the share of old people is expected to peak. Retired people relying on their shrinking pensions are not likely to buy new houses or to move to better flats. Germany’s population has been shrinking since 2002, by an average of 50,000 persons per year.

Recently, state support for first-home purchases has been shortened (the so-called “Eigenheimzulage”) and the number of people qualifying reduced, putting more downward pressure on prices.

Berlin

Berlin’s low prices and cultural attractions have been a magnet for foreigners, and many articles have appeared on this subject (see e.g. DW-World). Berlin is becoming Europe’s bohemian cultural capital, becoming the home of thousands of artists, actors, filmmakers, and musicians delighted to find cheap, elegant, city-centre places to live and work. As a partial result, prices have risen substantially.

Berlin house prices are now expensive on a price/earnings basis relative to other German cities (Munich excepted), according to a Deutsche Bank report.

There is hardly any industry left in Berlin -- many big companies like Siemens moved away after World War Two and during the Cold War. The banking industry resettled in Frankfurt. Also, many government jobs stayed in Bonn. The unemployment rate in Berlin is 15%, nearly double the national average, and income levels are below average.

There has been an above-trend rate of rent increases of almost 10% over the past four years in the city, as Lehman Brothers real estate pointed out in a March 2008 report, 'Finally the comeback of Berlin?'.

Rental yields up

Rents for existing homes in Germany have increased 2.0% (nominal) p.a. 1900-2007, versus an 0.6% increase in the value of owner-occupied apartments, leading to higher yields, according to Bulwien.

Rental yields on small flats in Berlin (30 – 75 sq. m.) are generally higher than other sized units, at 7% - 7.35%, according to Global Property Guide research. Bigger properties have yields at 5% to 5.5%. Rental yields for Frankfurt flats range from 5% to 6.6% while Munich flats have lower yields, at 4.4% to 4.6%.

More Germans live in rented accommodation than in their own homes. About 58% of households are renters, one of the highest proportions in the world. Private landlords own about 46% of the housing stock, social housing is around 6%, and co-operative rentals are around 6%.

Threats?

Institutional investors have been major foreign buyers of German property. A decade of flat prices has made property in Germany seem undervalued relative to other European markets. In 2007, German property investment transaction volumes reached a record €75 billion.

Half the buyers were Anglo-Saxon, according to Marcellino von Hoensbroech, managing director ar CarVal Investors.

The U.S. dollar's slide against the euro could make it attractive for U.S. investors who bought real estate in Germany three or four years ago to start selling some of those properties.