Courage! A statement against real estate Angst

A pamphlet against pessimism

Here we go again, with a rash of various studies speculating on real estate bubbles, the great price decline and the end of the real estate boom in Germany's cities.

Just what is it? Discomfort about property ownership in a country largely made up of renters? General suspicion about the future - the proverbial "German Angst"? Why is there an important study every year that warns against speculative property prices in Germany’s cities, and thus basically against buying property? I would like to take a different perspective here and, as an active player in the Munich real estate market, counter this with my own view of things.

Let's cast a look back. In 2019, experts from the German Institute for Economic Research used artificial intelligence to determine that the risk of a price bubble in Germany was more than 90%. Also in 2019, we heard from asset manager UBS Global Wealth Management that Munich had the greatest risk of a bubble - of any city, worldwide. This observation was prominently featured in their annual Global Real Estate Bubble Index in 2020. The Berlin-based market research institute Empirica, which measures risk indicators for the danger of bubbles in Germany's top cities on a quarterly basis, also sees Munich, among other places, as regularly exposed to a high risk of a bubble. The analysts attribute this danger to impending housing surpluses, price ratios and excessive debt.

Most recently, the state development bank KfW has again identified indicators of regional speculative price exaggerations for real estate. It cites declining immigration to Germany and an increasing supply of housing through new construction as the two main causes.

By contrast, a new study by Deutsche Bank subsidiary DB Research reckons with a decline in property prices, and even comes up with specific annual figures. Due to changes in immigration and the end of the supply shortage, the end of the nationwide real estate cycle can be expected in 2024. In Munich, any supply shortage had already been reached by 2020, they say. However, the researchers admit that the analysis did not take vacancies into account. Since the vacancy rate in Munich is almost zero, the cycle is likely to last even longer than the model calculation of the study the authors actually predict. Nevertheless, persist the analysts, the Bavarian capital is gradually losing its appeal for investors.

There will certainly be many more such studies and analyses. In my opinion, they all do one thing above all: they contribute to a great deal of uncertainty and send the message that you always need to be very careful when buying property. And the media, as always, like to jump on this bandwagon, because the next bubble is bound to burst somewhere. And naturally, firstly here in Munich.

FACTS INSTEAD OF CONJECTURE

Let's have a look at the current figures for the Bavarian capital - far removed from complex model calculations and without the use of artificial intelligence. Because in my opinion, these figures speak a clear language.

Between 2016 and 2018, around 23,700 new apartments were completed in Munich. If you believe a study by the Institute of the German Economy (IW) from 2019, however, that is only 67% of the apartments actually needed here. With building land resources clearly limited, new construction cannot come close to meeting requirements, now or in the foreseeable future. 

This high demand for housing will not be substantially altered by the Corona pandemic. Although there was negative net migration in Munich in 2020, current estimates expect the population to increase to 1.85 million by 2040 due to the city's economic attractiveness. And everyone wants to live somewhere. Added to this is the marked trend towards single households: In 2019, Munich recorded 55% single-person households. What is likely to change here over the coming years? To be honest, I cannot see any indicators of a bubble from such figures.

"It would be [...] speculation to bet on further increases in housing prices and rents in already expensive cities," write the authors of the KfW study. This, in turn, underestimates the fact that the motivation to buy in Munich is neither strongly yield-driven nor speculative. Those who buy property here want to use the property themselves or are simply looking to provide for a secure retirement. The demand is real. We feel this clearly - we had over 30,000 purchase enquiries in the Corona year 2020. That was 20% higher than in 2019. A glance at our archive shows: In the past ten years, the search queries from prospective buyers have risen continuously every year.

However, it doesn't take artificial intelligence or research departments to predict that the next ten years will probably not bring such price increases in real estate as over the past ten years. It is much more likely that prices will move sideways, with swings up and down depending on the situation, as was the case in the early 1990s, before the outbreak of the global financial crisis.

STRICT LENDING STANDARDS AGAINST EXCESSIVE INDEBTEDNESS

There is another extremely important factor that, in my opinion, is given too little consideration in all these discussions – and that is the strict lending standards of the German credit institutions for mortgage financing. Unlike in the USA, for example - where this was one of the triggers for the bursting of the real estate bubble there, which led to the financial crisis - the granting of ninja loans (no income, no job, no asset) - the banks in this country only approve loans if they can be repaid. In the past year, some banks have also tightened their lending guidelines considerably, capped the financing of real estate and significantly increased risk provisioning overall. Incidentally, according to the NPL Barometer 2021 of the Bundesvereinigung Kreditankauf und Servicing e.V., German credit institutions do not expect any significant increase in non-performing loans for residential real estate loans until 2022.

In addition, the interest rate policy of the European Central Bank will not change in the foreseeable future, so that borrowers whose fixed borrowing rates are about to expire can continue to expect low interest rates for follow-up financing. And at least for Munich, this holds true - despite the high prices, buyers have the necessary equity capital available, whether through inheritances or through already existing property ownership. And herein is the real scandal: that it's almost only the people who have existing assets who can still buy property in the metropolitan regions!

AS IF WE NEED ANOTHER STUDY

Germany is a country of renters - only 42.1% of people live in their own four walls, according to the Federal Statistical Office. In Munich, the tenant rate is 75%. At the same time, Germans - again, as another recent study by the IW reminds us - still dream of a house with a garden. But if the regularly published studies on the real estate market are constantly sounding the alarm and spreading a fear of buying, we have to ask ourselves, what is going wrong? People want to buy property, but are basically always told by such studies: Better leave it alone!

How about a study on how to get more people into property? Here, of course, the results would be anything but positive - but this time not for the buyers, but for the politicians. Not only do they make a lot of money on every property purchase, but they have also driven up building costs massively by imposing a mountain of regulations. There are plenty of ways of making the purchase of property in our country much more affordable. For just one example, it would be worth considering making private mortgage interest on owner-occupied property tax deductible.

I would like to see more courage on the subject of real estate ownership in our country, not just another study here and a newspaper article there, all of which serve to spread worry and uncertainty. This makes everyone sit in fear like the proverbial rabbit in front of the snake. Basically, you only have to write about ‘the worst being yet to come’ continually, until you eventually get it right. And of course, the expression that "trees don't grow to the sky" applies equally to the real estate sector.

Hence my appea,l at this point. Just as in the case of old properties (to stay with the metaphor) tree stock must sometimes give way so that newly planted trees can grow upwards again and thus ensure the cycle of healthy growth, political decision-makers should take responsibility with completely new decisions in order to respond to the market's actual needs.

In other words, people want to acquire residential property in order to be able to live rent-free in their old age. This is exactly what should be supported - with proper and serious measures. 

A propos: In an interview with the magazine Wirtschaftswoche, Empirica CEO Rainer Braun answered the question of whether a real estate bubble would soon burst in Berlin and the other metropolises, as follows: "We definitely see potential for a setback in the seven top cities. On the one hand, because we're already seeing the slowing-down of the influx into the sought-after swarm cities; and on the other, the granting of so many building permits promises an early relief to the pressure on the housing market. As a result, demand pressure should fall while supply rises."

That was back in 2017.