Europe Economy

Germany’s Housing Market Is ‘Flying’ – But Is It a Bubble?


Even as some housing markets in Europe have cratered, Germany's housing market has gone from strength to strength, particularly in its cities, as a result of low interest rates and high demand.  Though the phenomenon has prompted fears that Germany was heading for a housing bubble, property experts told CNBC that the strongman of Europe is safe, for now.

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In a report on global housing markets, Goldman Sachs called Germany a "high flyer" and noted a sharp increase in property prices in the country after an era of notably quiet and stable prices. 

Indeed, prices in cities such as Berlin, Hamburg and Munich have risen between 5 to 20 percent in a year, according to property price analysis by German bank Helaba and property consultancy, Jones Lang LaSalle, respectively.

Price increases are imprecise as Germany has no consolidated housing index, such as the Case-Schiller index in the U.S., to measure house prices, according to one expert who track the market. But analysis by Deutsche Bank revealed that the German housing market — previously noted for its lack of fluctuation — had risen 2 to 3 percent per year since 2009.

The rise in urban house prices was attributed to increasing numbers of Germans flocking to cities find employment and investors rushing to snap up perceived safe-haven assets as alternative investment options dwindle, Deutsche Bank said, noting that this trend would continue. 

"The flight to safe havens is likely to continue to support German house prices in the near future with prices likely to rise fastest in cities with more than 500,000 inhabitants."

Such increases have led to fears of a property bubble in Germany, most recently typified by a research note by Thomas Harjes, senior European economist at Barclays, who said that "many of the ingredients for a future house price bubble appear to be in place."

"Once a broad-based positive price trend is established, it often feeds on itself and could result in price exaggerations…But we see only limited risk for such future price exaggerations, also because the German authorities, including the Bundesbank and banking supervisor Bafin, are on high alert."

"Currently, the typical signs of a housing price bubble, including a strong increase in bank credit, a broad-based and undifferentiated strong upward price trend, and very high transaction volumes are not yet apparent."

Analysts speaking to CNBC have agreed that Germany is safe for now.

Dangers Yes, But No Bubble

The country's property market remains robust, despite the heady increase seen in cities, Stefan Mitropoulos, an analyst at German bank Helaba, told CNBC.

"The housing market is rising, but only compared to the last ten years," he said. "It is concentrated in big cities where there has been up to a 9 percent rise in a year, particularly in Berlin, but there is no precise measurement," he said on Tuesday.

In a research note by Mitropoulos released in October, he said that the German aversion to inflation, poor investment alternatives and historically low financing interest rates were "the ingredients for a flight on the part of German investors into "concrete gold."

"The German housing market is considered stable by international standards," he wrote, however he adding that the house price rise was justified due to low supply and high demand in cities.  "There has been low building activity in the last year and a high demand for housing in the cities where populations are rising," he added.

Mitropoulos didn't discount the risk of an urban housing bubble, however.  "Housing markets are cyclical and it is not always very secure.  In Germany, there was not much movement for 10-15 years but it doesn't show us that it will always be the same."

"The main risk is not that prices are too high but that they are going to continue to rise," Mitropoulos said.

"As a result, if the robust increase in prices for German residential real estate continues, an overheating in certain markets cannot be ruled out over the medium term," he continued. 

The danger, in Mitropoulos' view, was that an economic recovery in Germany and the rest of Europe would see a return to much higher interest rates.

"Many households that are currently buying housing property with large loans at around 3 % could have trouble refinancing in ten or fifteen years once the interest rate level has normalized," he said, recalling the 7.7 percent rates seen during the post-reunification property boom in the 1990s.

"It took the industry a decade to recover from that," he said.

Demand to Remain High

Home prices have risen even as Germany's economy has cooled on weaker demand for its exports from other euro zone countries. Germany's gross domestic product has deteriorated this year, after expanding by 0.5 percent in the first quarter. GDP growth slowed to 0.3 percent in the second quarter and weakened further to 0.2 percent in the third quarter.

Helge Scheunemann, head of Research Deutschland at global real estate consultancy Jones Lang LaSalle, told CNBC that despite the negative economic data, it was unlikely that the appetite for German property would be sated soon.

"Indeed, when Germany's economy shows signs of weakness, demand will be affected and prices and rents will come down. That means the values also will decrease," he told CNBC. "But, we do not expect a dramatic drop as we do not expect a recession or a negative growth of the German economy," he said, alluding to German growth forecasts of 1.2 percent, year on year, in 2013.

"Demand will be stable also in weaker years as the number of households is growing. In addition to that most investors who have entered the German housing market are long term investors who are able to overcome a potential period of decreasing values," he said.