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Is Germany experiencing a housing bubble

Is Germany experiencing a housing bubble

The German housing market in 2018/2019

Price and rent outlook for Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart

Cartoon picture of a house blowing up gum

Many people are asking  “Is there a bubble forming here?”. The first one was Why German’s think the property market will crash. In that article, I talked about being anchored in your history bias. About how your experiences growing up affects your worldview. German and especially expats are struggling with the idea of a booming housing market. Either they don’t believe it or dismiss it as a bubble which will burst taking prices down 30 plus percent.

This one from Bloomberg

Germany’s Housing Market Is Red Hot, But Don’t Call It a Bubble

Or this one from DW English Media

Bundesbank warns of German real estate bubble

So who’s right?

I don’t think discussing the technical side of the economy will help. Things like the M2 money supply or the ECB and QE (Quantitative Easing). When it comes to bubbles you’re better off looking at investor attitudes instead, As Doug Hoyes mentions in podcast number 199 of Debt Free in 30 – The Podcast Podcast. Personal finance is more about behavior than math. I think that applies just as much to housing as it does to your personal budget. At the peak of the recent housing bubble in Canada, the normal calm Canadian approach to buying a house was replaced by  FOMO or Fear of Missing Out. People began sleeping out overnight at new developments. Not to buy a place but simply be first in line to put an offer in. There are reams of stories about people putting in bully offers, going way over asking. There are all classic signs of a bubble.

Now one could argue that Germany is experiencing this. Talk to any real estate agent (Makler) and they’ll tell you it’s not just a seller’s market but a huge seller’s market. Berlin and Frankfurt are booming. But this has a lot to do with how Germans feel about life. My parents moved 6 times in their life, my German in-laws who moved to Canada after the war bought a place and moved once. And then only due to business needs. German’s tend to buy and never move again. So this has a knock-on effect on the market. The second reason is that prices are low compared to other European cities. The final reason is outside of Berlin and perhaps Munich prices are very reasonable and it’s not hard to find a property with 4% yield. So I’m going to step out on a limb and say that Germany is not experiencing a housing bubble. And as a matter of fact, I think the market not only has legs but has a ways to go.

 

 

The German housing market is right where the red line is. We are at what I believe is the beginning of what is going to be a long and profitable bull market. But does this mean that buying is a sure thing? Absolutely not: as with rental market the housing market is very different from the market in the English speaking world.

Why Germans feel the property market will crash

The Psychology of Money Making and the German Property Market I realize that the title of this article is somewhat awkward. The Psychology of Money Making and the German Property Market. My oh my any SEO person or blogger might be thinking, “man, that’s strange title if you’re trying to get traffic”. But the thing is psychology and biases matter greatly in investing. If you’ve ever met with a Financial Planner  (Vermögensberater in German) they, will at some point, talk about the various biases and how they affect your investment decisions. To be honest it’s not the most exciting of topics. It’s also one, that when you bring it up with clients, their eyes tend to glaze over. It’s not just that it’s a boring subject but it’s hard to quantify in real life.

 

Anchored-to-your-own-history bias

This is where the rubber hits the road.

Now, where this gets really interesting is when we look at how our own history affects our thinking. If you moved to Germany in the late 90s to early 2000s the German real estate went sideways and, when, accounting for inflation actually lost money. If you moved to Germany, and, especially Berlin in the last 8 years you have a totally different view of the market.

As Morgan Housel talks about in his excellent article Anchored To Your Own History Bias

If you were born in 1970 the stock market went up 10-fold adjusted for inflation in your teens and 20s – your young impressionable years

when you were learning baseline knowledge about how investing and the economy work. If you were born in 1950, the same market went exactly nowhere in your teens and 20s:

 

There are so many ways to view this. A person who moved to Germany during the market slump has a very different view than someone who’s had to outbid 20 other people to get a property. This coming of age really affects your view. Even people who work in the industry are really struggling with the idea of a booming property market.

I’ve been saying for a  while that the German property market has legs. All this talk of bubbles and crashes is nothing but chatter. This excellent analysis from Deutche Bank confirms what I’ve been saying for a while.

 

 

First off as with any article written by Germans about the housing market here always seems to raise the specter of a bubble. Quite understandable when you see how fast prices are rising. When we think of housing bubbles we tend to look to Japan for a model of how it might play out. Prices peaked in 1991 and then crashed. 30 years on prices are still below bubble.

I don’t believe this is relevant to the German market at this point. Bubbles tend happen when prices out pace fundamentals. Or, as often in the in the case of the housing market, FOMO or the Fear of Missing Out. That is when people begin to fear that they will be priced out of the market forever and go to great lengths to buy. Typically this tends to happen at the very tail end of the housing cycle. As we’ll see in a moment this simply isn’t true.

I’ve been saying this for a while now but this jumped out at me.

Data from a number of cities confirm that demand is high and supply insufficient.

What is interesting is, as you read the report, in cities where supply and demand is balanced. Prices are more moderated. Dusseldorf, for example. There the city  has for the most part managed to keep supply and demand balanced. As a result rents and house prices are much more moderated. But for the other major cities, especially Berlin and Munich demand vastly out paces supply. When this happens prices rise. It should be noted that again this refers to both the housing and rental markets.

He Goes on to say

Seeing that there is already a shortage of 40,000, more than 100,000 new residential units would need to be built by 2030. However, with only 8,500 residential units planned to be completed each year, residential space will likely remain in short supply until 20. If the forecast materialises, Munich will be more obliged than any other German city to rethink its current development policy. At the moment, the administration is not focused on promoting construction, but on developing stricter regulations.

And

According to official statistics, the gap between construction permits and completions remained high … For years to come, a steady rise in demand for housing will meet with inelastic supply

This is the German version NIMBY or Nimby. This is an acronym for the phrase “Not in My Back Yard”. Germans do quite well at density. It’s rare for a development to be stopped for this reason.

This is a point that I really want to emphasis. Housing here, relative to other places, is still extremely affordable. To help you understand compare a middle class home in Toronto Canada to Berlin. There a single family dwelling (SFD) will set you back more than a million CDN dollars. Not only that but the upkeep costs are much higher, long term averaging 1% a year. Secondly property taxes and mortgage rates are higher than in Germany. For those that choose to live in Condominiums (Flats) the hausgeld typically is much higher than in Germany.

Despite this jump, which considerably exceeded the uptrend in most other major metropolitan areas, house prices in Berlin are still relatively low.

 

Headwinds on the Housing market

The author makes a lot of excellent points here most of which are fairly standard. Rising interest rates, slowing economy etc. But I think there are two quite relevant ones that the author didn’t over.

Foreign Money

The first one is specific to Berlin. With almost 90% foreign ownership there is the real possibly that the hot money will dry up. At this point I would expect house prices to level out as demand slows somewhat. Secondly as prices level investors may decide to take profits, especially once the 10 year, tax free, point hits.

Rent Control

The second one and, for investors, a much more relevant risk, Rent control. Here I’m not referring to the Mietpreisbremse but to proper rent control. This would immediate cap rent increases to the rate of inflation. This would have the effect of pushing rental yields down. Currently prices and rents tend to rise in tandem.

The Bull Case

As I talk about in my book the The Complete Guide to German Property Investment. Property cycles tend to run in very long cycles. Peak to trough is typical 25-35 years. We are barely a decade into this current boom and I see no reason why this should change.

Secondly Germany is changing. People might has once rented for decades now want to be owners. This is driving also demand.

The old adage about real estate still applies. Whether it’s a boom or a bust real estate is always about location location location. Quality never goes out of style!

I wrote the book The Complete Guide to German Property Investment to help people navigate the property market here.

Whether you’re an expat looking to buy a place to live in or an investor looking for the best deal my book can help.

Book cover The Complete Guide to German Property Investment

 

Buy it here

 

 

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