Although nationwide housing prices have grown by an 8.25% average, in urban areas such as Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Düsseldorf they have increased by 25% in just three years.
According to the Bundesbank estimates, prices in the urban housing market could go up by 10% higher than the level which can be explained by demographic and economic factors alone and “in the attractive large cities, the upward deviations in this segment are as high as 20% in some cases.”
According to its October monthly report, the Bundesbank recognized that the increase in demand is due to several interrelated factors such as economic growth, good labor market situation, the euro crisis deriving international investors to Germany and, especially, the ECB’s monetary policy of low interest rates.
So after ECB’s surprise decision to drop its key interest rate to the lowest level ever (0.25%), the worry harbored by Germans that their savings and long-term investments like pensions will be devoured by inflation has increased and prices for what are believed to be safe investments as real estate don’t seem to stop growing.
“Unprecedented low interest rates substantially devalue savings in Germany and the euro area and increase the danger of bubbles,” the Association of German Public Banks said in a statement.
Michael Meister, deputy head of the Conservative Christian Democrats’ parliamentary group, told the Berliner Zeitung newspaper that “the danger of a bubble developing in asset prices already exists, and this decision has not lessened it”. On the other hand, Carsten Schneider, the SPD’s budget policy spokesperson in parliament, also declared that “in Germany, the risk continues to grow of credit-driven asset price bubbles and this decision will not reduce it.”
Despite the fact that German annual inflation in October was recorded at 1.2 percent, down from 1.4 percent in September and reaching its lowest rate since August of 2010, worries in Germany of a bubble in real estate prices are a particular concern.
However, Bundesbank remains calm and maintains that the rising price of housing is harmless because the houses are not usually financed with credit, but many buyers are investing their savings. It’s a fundamental difference to the financial crisis in the United States or Spain, where prices increased but also the loans. According to the note of the German Federal Bank, issued mortgage loans have grown modestly since 2010 and believes that it is very unlikely that this will result in macroeconomic risk or dangers to German financial stability.
The Bundesbank is not expecting an easing of price pressures in the short term. Despite the steep growth in housing construction, the housing supply is still not sufficient to meet the additional demand for housing and noted that it’s not going to restrict the amount by which rents can be increased. “Further robust growth in the construction of multiple-family dwellings can only be expected for as long as investors continue to see enough yield potential in the buy-to-let market,” the Bundesbank concluded.