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Fitch: German Residential Property Market Not Overheated

The Fitch rating agency has sounded the all-clear signal: The purchase prices for residential real estate in Germany will rise at a rate of barely 3 percent, which is around 1.5 percent less than a year ago. Although the price growth in some metropolises is considerably higher and exceeds the average income growth, Fitch does not deem the market overheated.

Price Drivers: Low Interest, Slow Construction, and Inflation Fears

According to Fitch, the price hike is explained by the favourable economic development of Germany and the stagnation of purchase prices in the years up to 2009. The main price drivers are low mortgage interest and the high demand for residential property investments that goes unmet because of the sluggish pace of construction.

The rating agency went on to say that fears of a rising inflation that are fanned by the euro crisis have a price-driving effect and encourage investors to seek refuge in tangibles. However, the stable economic environment and the persistently robust demand will result in a modest medium-term price growth for residential real estate, according to Fitch.
The agency assumes that purchase prices will start pushing up again in the foreseeable future because the macro-economic conditions will remain auspicious. Unemployment in Germany has dropped to the lowest level seen since the country's reunification in 1990, and the collective agreements negotiated lately are sound. Both factors were said to boost the general purchasing power. Since the lending environment remains affordable, the income-to-debt ratio has gone down for the first time since 2009.

Residential Real Estate: Affordability Remains Stable

Fitch expects the affordability of residential properties to remain stable this year because incomes and prices are growing in sync. Fitch also believes that interest rates will maintain their low level while expecting them to rebound in the medium term. The mortgage market will remain stable this year. Since 2009, the number of new mortgages approved has increased at an annual rate of seven percent. The agency assumes that the favourable market environment will cause the lending volume to perk up slightly in 2014.

The comparatively high affordability of residential real estate could encourage the premature repayment of an increased number of loans. Then again, the agency refrained from venturing a forecast because of certain peculiarities of the German residential real estate market, such as the early termination fee.