German Housing Market Heats Up

Statistics from Europace indicate the German residential real estate market is improving after a dismal quarterly performance. The country’s overall price index increased 1.94% in real terms for …

Statistics from Europace indicate the German residential real estate market is improving after a dismal quarterly performance. The country’s overall price index increased 1.94% in real terms for the year ending in April, with the biggest gains seen in Berlin. The Federal Statistics Office reports the GDP is down and will likely slip further, making it difficult to predict whether the recent boost is a temporary windfall for the market. Analysts believe that focus will shift to single-family homes in the future, despite the fact that the majority of Germans are renters. For more on this continue reading the following article from Global Property Guide.

Lately, property prices in Germany have been starting to pick up. The overall house price index rose 3.1% (1.94% in real terms) y-o-y to April 2013, after experiencing three consecutive months of annual price decline of 1.9% in March, 2.5% in February, and 0.7% in January, according to the figures released by Europace.

  • The hedonic house price index of new homes rose by 5.2% (4% in real terms) during the year to April 2013.
  • The hedonic house price index of existing homes was up 8.7% (7.4% in real terms) y-o-y.

Hedonic indices attempt to compare like-for-like exactly, so should be a better measure of house price trends than other indices.

Dr. Klein’s trend indicator of property prices (DTI) showed a strong upward trend in West Germany’s housing market in Q1 2013.

The biggest gainer was Berlin, where the median price for apartments was € 2,333 per sq. m., a gain of 9.91% compared with last year. The price of one-and two-family houses averaged € 1,771 per sq. m., a gain of 6.88% compared with last year.

Munich was the housing market leader in the south, with luxurious family houses reaching a new average price of € 9,535 per sq. m. The median price of apartments in Munich was € 3,053 per sq.m., and of houses € 3,951 per sq. m., with one and two family house prices rising 7.20% compared with last year.  These strong price rises continue a long period of boom in Munich’s housing market.

In Frankfurt, luxurious family houses had an average price of € 7,227 per sq. m. The median price of apartments in Frankfurt was € 2,468 per sq.m., and of houses € 2,030 per sq. m., with house prices rising 3.00% compared with last year.

In Dusseldorf, luxurious family houses had an average price of € 4,567 per sq. m. The median price of apartments in Dusseldorf was € 2,226 per sq.m., and the median price of houses was € 1,815  per sq. m., with house prices falling – 0.39% compared with last year (in contrast, the median price of apartment in Dusseldorf rose by 7.95% compared with last year).

In Cologne, luxurious family houses had an average price of € 4,650 per sq. m..  The median price for apartments was € 1,815 per sq. m., and € 1,839 per sq. m. for one-and two-family houses, a gain of 3.87% compared with last year.

In Hamburg, the median price for apartments was € 2,850 per sq. m., and € 2,720 per sq. m. for one-and two-family houses, a gain of 6.42% compared with last year.

Total dwelling permits rose 4.8% to 239,465 units in 2012, according to Federal Statistical office (Destatis). In 2011, a 21.7% y-o-y increase in dwelling permits was recorded, with a 14.6% increase in dwelling completions, to 183,000 units.

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Germany’s economy barely expanded in 2012, with GDP growth of 0.7%, a sharp slowdown from the economic rebound of 3% GDP growth in 2011 and 4.2% growth in 2010, itself a bounceback from the 2009 recession.  Germany is expected to expand at only around 0.3% in 2013 and 1.5% in 2014, due to the continuing structural problems in the euro zone, according to Deutsche Bundesbank.

Where to buy – East or West?

After more than two decades of Germany’s reunification, am economic gap between the east and the west remains apparent.

Unemployment in Germany (5.4% in April 2013), is more concentrated in the communist east than in the west.   A wage gap also persists. According to Deutsche Bank research, the gap in state sector wages between east and west was only around 10% in 2011, but private-sector wages have converged at a much slower pace. From a wage gap of 50% in 1992, the gap is still 30%.

East Germany is also older. In eastern regions, the proportion of inhabitants aged over-65 ranges from 22.1% to 25%, while the proportion in the west ranges from 19.4% to 22.1%.

Germany’s declining and ageing population is hardly positive for the housing market. The number of households is projected to rise 7% in west Germany over the next 15 years, but only 2.4% in east Germany, according to Deutsche Bank research.

  • Ten Neue Bundesländer regions are expected to see static household growth, while 13 regions will experience falls.
  • Yet in prosperous West Germany, only 3 out of 74 regions are expected to see a decline in households.

Single-family homes are the future

There will also be a shift away from apartments, towards single and two-family houses (duplexes) in the next 15 years, according to the research firm Empirica. By 2020, an additional 1.5 million single-family houses are projected to be needed in the west, while only 500,000 units will be added in the east.

Mortgage market

Mortgage growth has been sluggish since 2000. Outstanding loans increased only from from €1.03 trillion in 2000, to €1.27 trillion inQ1 2013.  Outstanding housing loans rose from 30% of GDP in 1991 to 50% of GDP during 1999 to 2003, but as of 2012, loans were down to around 47% of GDP.

Fixed rate mortgages

Home-buyers in Germany mostly borrow at a fixed rate. During 2003 to 2012, an average of about 67% of the new loans approved had an initial rate fixation (IRF) of 5 years or more, while loans with IRF of up to one year have never exceeded 20% of new loans approved.  In 2012, loans with IRF of up to one year were only 14% of total loans approved.  This interest rate profile gives considerable stability to the housing market, which tends not to suffer from the sudden lurches in rates, or in the value of houses.

When the ECB cut its key interest rates from 4.25% in September 2008 to 1% in May 2009, housing loan rates on IRF of 5 years or more only fell from 5.17% to 4.35%. Loan rates did fall further to 3.58% in October 2010, as ECB maintained its 1% key rate.  It is only since the ECB implemented its 0.75% base rate in July 2012, that housing loan rates in Germany have been below 3%.

Housing loan rates in April 2013:

  • Interest Rate Fixation (IRF) up to 1 yr:  2.87%
  • IRF 1-5 yrs: 2.5%
  • IRF 5-10 yrs: 2.74%
  • IRF 10 yrs or more: 3.08%

Relative stable interest rates, with rate changes affecting only a low proportion of borrowers, are the key to Germany’s house price stability.

Housing supply

Since the mid-1990s there has been a substantial drop in housing completions, in part caused by policy changes such as a rise in VAT from 3% to 19% in 2007, and the abolition of owner purchase subsidies.

After Germany’s re-unification in 1990, the Neue Bundesländer (New Federal Countries) and East Berlin saw much new residential building. A major incentive was tax write-offs for the construction of large-scale rental dwellings. Completions rose from 257,000 units in 1990, to an average of 500,000 units between 1995 and 2000. Unfortunately, many of these investments turned bad. Whole buildings stood empty for long periods.

In 2011, dwelling completions were down to 183,110, from the peak of 583,517 units recorded in 1995.

Rental market

Most Germans live in rented accommodation. Owner-occupation fell slightly from 43% in 2002, to 42% in 2006.  The proportion of renters to total households is among the highest in the world. And much of this is in the hands of private landlords (36% of the housing stock).  Social housing is around 5% of the total, and co-operative rentals are around 5%.

Rent increases have outpaced real estate prices since 2000, leading to slightly higher yields. Rental yields on smaller flats are generally higher than bigger units, according to Global Property Guide research.

  • Rental yields in Berlin for 75 – 120 sq. m. flats range from 4.12% to 4.29%, while 180 sq. m. flats have a 3.43% yield.
  • In Frankfurt, rental yields range from 4.24% to 4.68%.
  • Apartments in Munich have generally lower yields. Yields for 45 – 75 sq. m. flats range from 3.88% to 4.66%, while bigger units have yields ranging from 2.88% to 3.6%.

Slower economic growth in 2013 and 2014

Germany saw a sharp economic slowdown in 2012 and 2013, with the economy weakening after strong comebacks in 2010 (4.2%) and 2011 (3%) following the 2009 recession.

During the first quarter of 2013, the unusually long winter  damped construction, playing a role in Germany’s meagre growth. In comparison to the previous year, real GDP was actually down by 1.4%, according to the Federal Statistics Office.

Germany is expected to grow in 2013 by 0.3% and by 1.5% in 2014.  The continuing structural problems in the euro zone drag down Germany’s growth.  The EU accounts for almost two-thirds of German exports.

Germany’s weak economic condition is a problem for Chancellor Angela Merkel, as she seeks a third term in office in the incoming September 2013 national elections.

The unemployment rate was 5.4% in April 2013, or 2.9 million.  But unemployment is still low by European standards.

Due to the country’s weak economic momentum, inflation is expected to remain below 2% this year. Inflation was 1.7% as of May 2013, according to Federal Statistical office (Destatis). In an effort to boost economies in the region, the ECB slashed its key rate to a historical low of 0.5% by May 2013.

This article was republished with permission from Global Property Guide.


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