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For some time now there has been chatter of a housing bubble in Germany, as home prices increased at levels not seen since the 1970s. Home prices increased 9.5 per cent year-over-year in the first quarter, after climbing 5.4 per cent in 2011. But Societe Generale’s Klaus Baader cites 4 key reasons that talk of a German housing bubble is premature:
- German real estate prices were declining at a time when “real estate assets were booming in much of the world.” From 1995 – 2009 home prices in real terms fell 23 per cent. Just as real estate prices are declining in the rest of the world according to the OECD, Germany is seeing the fastest rate of home price appreciation in the 22 countries included in the OECD’s home price data base.
- Homes in Germany are cheap and he house price-to-income ratio has for the most part been on a continuous downward trend since 1980. “In fact, compared to 1981, the ratio has declined by just shy of 50%. In contrast, in the euro area as a whole (including Germany), the ratio increased by some 38% between 1986 and 2010′.
- The ratio of home prices to rents peaked in 1981 and it is more expensive to rent a home than to buy one.
- What’s more, debt servicing costs have declined dramatically and making housing more affordable.
Demographics are a cause of concern
Baader writes that it is understandable that the Bundesbank is concerned about a bubble given the experience of other countries where home prices surged and eventually crumbled delivering a devastating blow to their economies. In this regard German demographics offer good cause for concern since they would determine not just demand for living space but also the country’s growth rate.
But given the stable growth in mortgage loans, he believes it is important to acknowledge that in Germany “there is demonstrably no real estate-induced credit bubble, nor is there a credit-driven real estate bubble”.
While this doesn’t mean that a price bubble can’t develop in the future, it does suggest that the rising home prices are more an outcome of re-pricing or real estate, rather than price inflation caused by a credit boom.
Baader writes that home prices could correct in the future, but that the most likely outcome is that German home prices will rise for a few years despite shorter-term changes in the economy.