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German housing markets continue to show improvement with values up by 3% year on year in 2013 compared to 4.5% in the previous year, according to a new analysis.

While price increases are quite high in some metropolitan areas and are clearly outpacing income growth, the German property market is not considered to be overheated, says the analysis from Fitch Ratings.

It says that this view is supported by the positive economic conditions and the long lasting stagnation of house prices until 2009.

The report also says that the main driver of German house prices are low rates and encouraging demand for property investment that is outpacing muted construction activity.

In addition, concerns over inflation and flight to tangible assets triggered by the euro crisis are also driving property prices. But the economic environment and ongoing strong demand are expected to moderately increase house prices in the medium term.

‘Fitch expects house price increases to continue for the foreseeable future as macroeconomic factors remain favourable,’ the report says, adding that with Germany’s unemployment rate at its lowest level since reunification and the power of trade unions growing, disposable income has increased. Combined with favourable financing conditions this has resulted in average German debt to income ratio decreasing since 2009 following years of stagnation.
 
However, Fitch expects the affordability to remain stable for 2014 as house prices and incomes are likely to increase in tandem.

At the same time interest rates are at a historical low, which favours the acquisition of properties and Fitch believes German mortgage rates will remain low in 2014, but will pick up gradually in line with the long term risk free rate.

A robust mortgage sector performance is expected in 2014 and since 2009 the average yearly increase in new mortgage lending has been 7%. Fitch says that the increase is not surprising and reflects the increased demand for properties. Lending volumes are expected to continue to increase moderately driven by favourable market conditions.
 
‘The relatively strong affordability may slightly increase prepayments on existing loans, although upside is limited given idiosyncrasies of the German mortgage market,’ it adds.

This article was republished with permission from Property Wire.