Not just because real estate prices keep going up, but also because the peak of the last financial crisis recently had its ten-year anniversary, the possibility of a real estate bubble in Germany once again became the subject of intense debate. On 15 September 2008, the US bank Lehman Brothers filed for insolvency, with dire consequences for the global financial system. Among the triggers of the financial crisis at the time was the bursting of the real estate bubble in the United States. Could the situation repeat itself on the German market?
The KfW development bank, for one, just let it be known that it is unaware of any nationwide price bubble.1 Although selling prices did soar quickly in Germany over the past few years, the development bank sees obvious differences between the current situation in Germany and historic real estate bubbles in the United States, Spain or Ireland.2
Germans are Not Excessively Indebted
For one thing, selling prices in Germany are lower at the moment than the long-term mean, relative to residential rent rates and household income levels, according to the KfW. On the other hand, the debt level of private German households is comparatively low in relation to the country’s gross domestic product and has actually been in decline for years. The public debt ratio was substantially higher at the onset of the crises in the US, Spain and Ireland.
The KfW also drew attention to the fact that the building sector in Germany does not claim a disproportionate share in the country’s economic strength despite the increase in construction activity. Investments in housing construction are projected to account for six percent of the gross domestic product in 2018; whereas the share in Spain and Ireland at the time of the real estate bubble was twice as high. Even in Germany itself, the building sector boasted a higher share than now during the 1990s and zero years, as the KfW added.
“The Market is Healthy, by and Large”
Marcel Fratzscher, head of the DIW German Institute for Economic Research, recently pointed out during an interview with the Handelsblatt business daily that real estate financing in Germany is on solid footing.3 Fratzscher went on to say that the present situation should therefore not be compared to the financial crisis of 2008. He sees no signs of a widespread price bubble in the real estate sector. “The market is healthy, by and large,” said Fratzscher, adding that the price hikes are explained by fundamentals.
As it so happens, Fratzscher considers the rent freeze, a rent control measure the governing Grand Coalition plans to tighten further, an unsuitable tool for coping with the brisk price growth, least of all in conurbations. According to Fratzscher, the situation on the German housing market can only be improved by expanding supply, for instance through an increase in available building land, faster permit procedures and “infill densification in the cities.”