Warning signs in Germany’s housing market

A bubble is not a bubble while it does not burst. This is one of the lesson global markets should have learnt from current crisis, but unfortunately it is an old idea coming from Fed’s president in the 90’s Alan Greenspan, who had to manage the “irrational exuberance” in stocks just before dotcom bubble occured in year 2000. However, the queen of bubbles in financial markets’ recent history will be forever real state one. Spain knows a lot about it and Germany may take vice now.

German housing market is overvalued between 10-20%, reaching 25% in some capital cities such as Berlin or Hamburg. During last year, real state’s prices in Germany increased by 6,25%. Figures do not come from any external or foreign source but from the country’s central bank, although they  assure no big macroeconomic risks are seen on the horizon. The Bank of Spain also talked about a 20-30% overheating of Spanish housing market prices in 2003, denied as well a bubble’s existance, and of course expected a natural sector adjustment.

On the grounds than any institution, even if they are European countries’ central banks, can really affirm a bubble, financial or other nature, has been created- why should be a bubble to buy a house at a price, let’s say, 10% over five years before if that is the price the market demands and investors pay for it?- the fact that Bundesbank underlined in its February monthly report that continuing increase of prices in Germany’s real state sector could be considered as a warning sign.

German families are the largest savers in Europe but their banking deposits are not profitable enough in the current context of low interests rates. Therefore, German experts admit national housing market is living a boom, but nothing to do with a bubble or Southern countries trends. “What we observe now is more normalisation of real estate sector than an overheating. Prices are slightly over 2% inflation in Germany. It is a truth that prices are increasing in big German metropolises, but we should have into account that compared with other European countries, those remain still very cheap, furthermore when considering their economic profile, competitiveness and capacity to take advantage from globalisation. What I mean is that if an overheating occurs after ECB’s policy, the reaction is not only a German reaction,” Jochen Moebert, real estate analyst at Deutsche Bank said Spanish magazine Consejeros a couple of months ago.

“Real credit has grown moderately in Germany. We are very far from prices’ pace in Southern Europe or the US before the crisis started,” Moebert added in a report jointy conducted with Regensburg University.

“Demograpy, economy and financial factors have led apartments and houses’ prices to rise by 3% yearly since year 2008,” according to Tobias Just Professor at Regengsburg University. In nominal terms, that increase was of 5-7% in big cities.

The significant growth in employment figures, low interest rates, some sort of trend to build and migration to Germany are behind the country’s housing market prices’ climbing.

As recently reported by Goldman Sachs, Germany is one of five hottest housing markets in the world, following Israel, Norway, Switzerland and Canada. Goldman Sachs analysts point out, however, that overall “given that house prices are just coming off a low base, national house prices are unlikely to be significantly overvalued at this point.”

 

Nearly half of German population prefer rent to buy a house, but they are seemingly changing their mind. Germany’s landesbanken surveyed their clients last year and results suggested that 50% considered real estate sector as the best way to save money and consequently 5% had decided to purchase a house. May German households have the intention to beat Greek and Spanish in terms of house ownership?