07 Mar The German housing market in 2018 -2019
Price and rent outlook for Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart
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.
- You can download the PDF here, below are my thoughts on this
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.
This is also known as a “sellers” market. When the roles are reversed and there is more supply than demand it’s known as a buyers market. 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.
Update: Germany, especially around Frankfurt we have a strange situation where not only has demand, thanks to Brexit, has vastly outstripped supply but there simply is no supply beyond new build.For what ever reason Germans are simply not selling!!!!!
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.
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.
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.
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!
Finally this reminder
One other issue which is driving prices up is building inflation. While the newspaper headline inflation might be sub 2% the cost of building has dramatically risen. Currently building inflation is running in the 6- to 8% range which is well above the rate of inflation. A lot of this is due to labor shortages (Germans like parents everywhere want their kids to be lawyers not bricklayers) Secondly building regulations are also adding to the cost of building. For example anything above 3 floors now requires an elevator. That adds costs to the building!