No Sign of Bubble Forming on German Housing Market
Despite hefty price hikes for residential property, there is no indication that a price bubble might be forming on the German real estate market. This is the gist of a recent survey compiled by the LBBW state bank of Baden-Württemberg. Going forward, the survey authors expect prices to keep rising, albeit at a slower pace.1
In 2017, purchase prices for residential real estate in Germany increased by an average of 8.3 percent year on year, according to LBBW. The price growth since 2010 now adds up to 48 percent, the survey went on to say. But LBBW predicts that condominium prices have yet to peak. Compared to other European countries, prices in Germany remain on a moderate level, or so the survey concludes. Prices in the United Kingdom, Spain or Ireland, for example, have been pushing up for decades while more or less flatlining in Germany during the same period of time. What we have been seeing in Germany since 2010 is therefore a catch-up effect.
Credit Growth Remains below Long-Term Average
To speak of an overheating market would therefore be overstating the case, according to the survey. The tell-tale signs of a real estate bubble include, in addition to a brisk price trend, unreasonably high leverage and a noticeably increased bank lending volume. As LBBW demonstrates, however, this is not the case in Germany. It appears that the credit growth in Germany stood at 4.7 percent by the end of the first quarter of 2018—and thus fell short even of the long-term average of 4.8 percent for the years since 1982. So, the number of debt-financed speculative acquisitions is by no means excessive at present.
The debate surrounding the formation of a real estate bubble has recently moved back into focus after a report by the International Monetary Fund (IMF) had warned against price bubbles in major German cities.2 The IMF actually called for a closer monitoring of the price trend. However, the Bundesbank, which the IMF cites in its calculations, concludes that notwithstanding the rise in prices there is no property bubble in sight.
The IMF moreover draws attention to the fact that the demand for residential real estate has been surging in Germany at a time of persistently short supply. While demand is boosted by growing household incomes, massive incoming migration and low levels of interest, the supply side is being held back by strict building regulations and short capacities in the building industry. The IMF therefore recommends tax breaks for newly constructed buildings and a review of the existing building and planning restrictions, so as to ease the strain on the housing market in Germany.3
3 www.imf.org/en/Publications/CR/Issues/2018/07/04/Germany-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46049 (in English, p. 22)