Trends imply no resi bubble

The question of a German housing bubble has been this year’s hot topic. The year started off with the German Bundesbank making an official statement about the inevitability of a “German residential bubble.” According to the Bundesbank, the residential property values had increased more than the underlying economic and demographic fundamentals supported. Rather, low interest rates and foreign “safe haven” investors (rather than legitimate owner-occupiers) were fueling the boom. This was cause for concern.

 

It is true that condo prices throughout Germany have climbed dramatically over the last decade, but we believe the fears of a bubble to be overstated. Breaking it down, the past five year growth spurt equates to a modest 4% annual growth rate throughout Germany.

 

german_new_condo_price_index

Source: Bulwiengesa

In the immediate term, Germany benefits from a stable economic climate, strong labor market and favorable lending environment. Unemployment hovers around 5% and household income has grown at a faster pace over the last five years than historically. New buyers have thus entered the market. Taking our own residential developments – Joli Coeur and Metropol Park – as examples, the majority of buyers are indeed owner-occupiers. Buyers of these condos have real equity, real loans, and are buying with the intention of living in the apartments; hardly bubble-like behavior.

 

Changing demographics and structural imbalances in the housing market also support the prospect of longer term price increases. 2013 was the highest year yet for migration into the country (source: destatis) and the graph below shows a clear trend toward urbanization in the larger metropolitan areas such as Munich, Frankfurt and Berlin (Potsdam). According to Bulwiengesa, which tracks real estate prices and demographic changes, this trend is expected to continue.

 

population_growth_by_regional_german_markets

Source: Bulwiengesa

Property prices are ultimately an outcome of the balance between supply and demand. A strong labor market, coupled with urbanization and immigration have fueled demand for housing, but supply still remains low, and this has led to a structural imbalance in the market. German housing construction starts are still way below their 1991 peak.

 

german_housing_construction_order

Source: Destatis

It seems that the housing bubble occurred in the late 1990‘s, post reunification and before Germany’s “crisis” years of 2004-2005. If you further consider the fact that Germany has the lowest home ownership percentage (50%) of any country in Europe and one of the lowest loan-to-value ratios (70%) on home purchases, you can assume that there is no “bubble” to be pricked, but a long term trend toward price growth driven by conservative financing, increasing urbanization, population growth, and a structural supply imbalance.

19th September 2014

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