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

(Bloomberg) -- Grit Hildebrandt finally found her dream house near the German city of Rostock two years ago, paying more than 10 percent over the asking price to beat the other bidders. She’s now glad she’s on the other side in the country’s red-hot housing market.

“When you really like a place and there are so few others available, you just have to bite the bullet,” the 38-year-old banker said by phone. “It’s an absolute seller’s market, and they know it.”

Germany’s residential property market has taken off in the last seven years, with apartment prices in the biggest cities rising more than 60 percent, according to Deutsche Bank AG. In Munich, they’ve doubled in value. The result? Homes in 127 German cities were overvalued by as much as 30 percent last year, the government said in a June report, adding that the low level of private indebtedness means the risk of a “correction” appears to be small.

The prospect of a real estate bubble prompted Angela Merkel’s government to take preemptive action in the run-up to next month’s national election. The country has been one of the leading critics of record low interest rates in the euro zone, which have pushed up home prices across Germany. In June, the government gave the financial regulator more power to intervene if home values appear to reach unsustainable levels.

“Rising prices on their own aren’t enough to create a bubble -- you have to look at the fundamentals,” Michael Voigtlaender, who overseas coverage of financial and real estate markets at the Cologne Institute for Economic Research, said in an interview. “We have a stable mortgage market with steady equity ratios, and fairly moderate levels of home construction.”

No Flippers

What’s more, homebuyers in Germany tend to hold onto their properties for years, rather than flipping them, to avoid paying a property-speculation tax. That makes the market more resilient to the kind of property slump that has hurt countries such as Spain and Ireland since the financial crisis.

“Hardly anyone buys an apartments with the expectation that they’ll be able to sell it soon afterward for a lot more money,” said Matthias Pink, head of German research at Savills Plc.

The government isn’t taking any chances, though. It has introduced a law to give BaFin -- the financial regulator -- more power to intervene if home values appear to reach unsustainable levels. For example, it could force banks to introduce stricter lending policies to damp the market.

Residential property prices climbed about 31 percent in the five years through the second quarter of 2017, according to data compiled by the Association of German Pfandbrief Banks, or VDA. Buyers took advantage of record-low interest rates and rising incomes in a country where renting has traditionally been more popular then purchasing properties.

The cost of buying groups of apartments has increased even more. The average price of a properties sold in a block of at least 50 homes has risen to about 101,000 euros from 54,000 euros in the past five years, Savills estimates. In Berlin, the price has jumped to about 141,000 euros from 59,000 euros.

‘Significant Headroom’

“We see significant headroom in upcoming years,” Deutsche Wohnen AG Chief Executive Officer Michael Zahn said on a conference call about the Berlin property company’s first-half results.

Germany’s central bank also sees no cause for alarm -- at least, not yet. “There is currently no real estate bubble in Germany that acutely endangers financial stability,” Bundesbank board member Andreas Dombret said in a speech in April. “But the traffic lights are flashing yellow.”

To be sure, there are signs that the property boom in some German cities may have run its course. In Frankfurt, Dusseldorf and Stuttgart, residential rents have stopped increasing, suggesting prices may follow, according to Juergen Michael Schick, president of the German Property Association, or IVD.

“The rents of today are an indication of tomorrow’s prices,” he said in an interview. “Germany has been catching up with other markets since 2010, but that process is now over.”

Grit Hildebrandt, meanwhile, has no regrets about her purchase. In Rostock, prices for her type of property rose more than 11 percent last year, according to real estate broker Engel & Voelkers, giving her at least a paper profit. “It was exactly the right thing to do,” she says.

--With assistance from Birgit Jennen

To contact the reporters on this story: Stephan Kahl in New York at skahl@bloomberg.net, Andrew Blackman in Berlin at ablackman@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Chad Thomas