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German property market is undervalued

The real estate markets are in constant up and down. These so called real estate market cycles have to be observed closely, in order to assess how the market works – and whether you should invest or rather not. The prestigious British weekly journal “The Economist” examines regularly whether the real estate markets of the industrialized nations are rather overvalued or undervalued.

One result of the current analysis is that the real estate prices in Germany are comparatively low. The ratio between the prices and the rents are clearly below the long term average. The same applies to the ratio between prices and income. The prices increased last year around 5.1 percent and since 2008 by more than 20 percent. However, before they stagnated for nearly a decade, so the current increases are to be interpreted mainly as a catch-up. The current undervaluation of residential property makes its entry into the German residential property market highly recommended by buying a condominium.

For the analysis “The Economist” used two indicators. First, the affordability of residential property is measured while the property prices are set in relation to the available income. Secondly, the ratio between prices and rents is observed. If these quotients are higher than the long term average (from the mid-1970s), this suggests an overvaluation of the markets. If the quotients are lower, then there is an undervaluation.

In addition to the German real estate market, the Japanese real estate market is also undervalued. In the Far East, the prices also declined last year by 2.2 percent. In contrast to this, there are extensive overvaluations for example in Canada, Sweden or France. Even in Great Britain, where the prices rose by 3.9 percent in the last year, the quotients indicate a current overvaluation of the property market.