Short supply, increasing demand, cheap loans: In no other country inside the eurozone will residential property prices be faster to rise than in Germany. This is the upshot of an analysis conducted by the Standard & Poor's rating agency. The low unemployment rate, the improved consumer sentiment, and a rise in the number of immigrants has been driving up prices. According to the analysis, this is likely to cause German housing prices to climb by an average of 4.5 percent in 2014, and by another 4 percent the following year – the fastest rate inside the eurozone. While price are growing even faster in the United Kingdom, the country is not part of the monetary union. Yet despite the price hike, the German market remains a rewarding investment destination.
Germany's Role as “Safe Haven”
While house prices did admittedly rise by 8.1 percent last year, residential real estate has barely outpaced the inflation rate when you look at the price trend of the past ten years. So the brisk price growth is little more than a perfectly natural catch-up process. Indeed, homeownership in Germany continues to be more affordable than in any other European country. Or so the Organisation for Economic Co-operation and Development (OECD) concluded at the end of a survey that compared the residential property prices with the average wage levels and rent medians of a given country in order to identify possible overheating tendencies on the markets. The relevant figures for Germany looked sound. According to the OECD, residential property prices are considerably undervalued – in regard to both wages and rent rates.
Price Bubble in the UK?
This contrasts starkly with the situation in the United Kingdom. Mark Carney, Governor of the Bank of England, considers the real estate market the biggest threat for the British economy. The housing market had made a spectacular comeback after the financial crisis. According to figures released by the UK's Office for National Statistics, sales prices for houses have increased by 26 percent since 2009. According to the OECD, house prices are overvalued by 23 percent when set in relation to wages, and by 32 compared to rent rates. The Bank of England would therefore like to raise its interest rates in order to slow the price growth.
The countries on the European periphery present an entirely different picture. The financial and debt crisis sent housing market prices on a nose dive in countries like Portugal or Ireland. Here, prices are undervalued. Spain, while located on the European periphery as well, takes exception to this because residential property prices are slightly overvalued, or so the OECD suggests.