Upward price spiral in German residential now slowing - LBS

Investors looking for yield are having a tough time in times of low interest rates and high liquidity, but there is still value to be had in German residential property, according to the CEO of LBS Immobilien, Germany’s largest building society and residential mortgage providers.

LBS Immobilien CEO Roland Hustert was talking to a group of about 200 high net worth individuals and family offices last week at the Kreissparkasse Düsseldorf Securities Forum. Prices rises have so far been “moderate”, he said, with the key differences being in new-build versus second-hand housing. The average price for the single family homes typically financed by LBS fell last year from €314,000 to €278,000, while the price of second-hand properties remained stable at €172,000.

On a European comparison, these prices are well behind Belgium, the Netherlands and France, said Hustert. In certain depressed parts of North Rhine-Westphalia the prices are even lower, he added.

(Frankly, we’re not quite sure where Hustert was getting his figures from. LBS research data is very good, and the bank is at the very coal-face of private mortgage lending across the country. Perhaps he was referring to a number of markets in NRW which have been in the doldrums for years, we don’t know).

What we do know is that the LBS research department in its latest study believes that demand for German residential has “reached its zenith”, and price rises this year for second-hand housing will rise by between 2% and 4%, in line with general income levels. This represents the first slowing of price growth in five years. The supply of new building is now helping to ease pressure on prices, except in many southern cities.

The LBS data is based upon the responses from 600 local branches of the German savings network (Landesbausparkassen and Sparkassen in 870 localities throughout Germany.

The researchers expect a price rise of 2.5% for building land and terraced houses, somewhat more for second-hand apartments and detached single-family homes, and up to 4% for new-build apartments. Overall, these prices rose by more than 5% last year, says LBS, but it stresses that in most cases prices for both houses and apartments cost now about the same or very little more than in 2000.

According to LBS director Hartwig Hamm, the big price differences are to be found in detached second-hand family homes, where regional differences are most pronounced. Among the big cities, existing single home prices are highest in Munich at €900,000, followed by Regensburg (€775,000), Stuttgart (€700,000) and Freiburg (€650,000). Individual prices can be higher in attractive urban hinterland locations such as in noble Munich suburb Grünwald at a record €1.2m, or Starnberg at €1m, or in Konstanz or Lindau on the Bodensee at €780,000 and €650,000 respectively.

Prices for new semi-detached houses are set to rise by around 2.5% this year, but they are still affordable in most regions, said Hamm. They are priced around €230,000 in large and mid-sized western German cities, remain below the €200,000 mark in the East and North, but have risen to €350,000 in the South due to serious supply shortages. A Munich semi-detached house comes to €690,000, in Regensburg to €575,000. Existing semi-detached homes are usually some 20% cheaper. “In some cases – usually because of their great location – they can be more expensive than new built, for example in Bonn,” said Hamm.

LBS predicts new apartment prices to rise by around 4% this year, most strongly in tourism locations, the large urban centres and university cities. Highest prices are seen in Grünwald at €6,500 per sq.m., well ahead of Munich (€5,300) or Hamburg (€4,000). Prices are still moderate, below €3,000, in cities such as Hanover, Bremen, Dortmund and Essen. Existing flats fetch 40% less on average, though demand is high. Average prices are at €1,900 in the South and €1,100 in the rest of the country. “Given the current financing conditions available, they are thus not more expensive than comparable rental apartments,” said Hamm.

Building land is also in short supply, particularly in the desirable southern states (Bavaria and Baden-Württemberg) and cities, where at €400 per sqm the price is three times higher than in the north (€130 sqm) and in the east (€80 per sqm). Not surprising, Munich again tops the list at €1250, Stuttgart €900 or Heidelberg €700.

Separately, a new study published by property broker Knight Frank says that medium-quality residential properties in Germany are undervalued compared to their peers in other countries. The study examines the pricing of medium-quality (i.e. average) residential properties in 27 markets worldwide, and compares them with prevailing levels of rent, income and a number of other factors.

Knight Frank concludes that these average-quality houses are overvalued in 15 of the 27 markets studied based on long-term affordability, with the risk of a correction especially high in Belgium, Norway and Canada, where a rise in interest rates could wreak serious damage, according to the researchers. Fairly valued were the USA, Italy, Austria, Switzerland, Iceland, and Luxembourg.

By contrast, Japan along with Germany is among the very few where average quality homes are still rated undervalued – not having risen by double digits since the beginning of the millennium, says the study.