Cheap credit NOT fuelling German real estate bubble - Bundesbank

Cheap credit is not fuelling a destabilising real estate bubble in Germany, said Bundesbank vice-president Claudia Buch recently. However, the Bundesbank is keeping a close watching brief on the situation, she said.

Ms. Buch was speaking at an economic conference in Aix-en-Provence in France earlier this month. Back in May the Bundesbank had issued one of its periodic warnings about rising house prices, particularly in the light of the steady rise in residential prices over the last seven years.

According to Ms. Buch, "We very closely watch the real estate market in Germany because we know that in over-valued real estate prices there might be a risk to financial stability. We don't see an immediate risk because prices are increasing, but there is not a lot of borrowing going on, so it's not a credit-financed increase in prices."

Ms. Buch's responsibility on the Bundesbank board is for financial stability. She said that the Bundesbank had less information about loan contract terms than other countries like France and was therefore less aware of credit standards.

Average real estate prices in cities including Berlin, Hamburg, Munich and Frankfurt have increased by more than 60 percent since 2010, the Bundesbank estimates, reflecting solid growth, low unemployment and low borrowing costs.

Buch said that the Bundesbank was generally concerned about low interest rates spurring risk taking at a time when asset valuations are already high. Recent data on prices published by the Postbank Wohnatlas show an increasing number of regions where the price of an average 100-sqm apartment has broken through the multiple of 30-times the annual rent.

(The recent Postbank Wohnatlas report was compiled by the Hamburg-based Weltwirtschaftsinstitut (HWWI) based on data gathered from 402 towns and regions across Germany.)

Residents of Munich have been used to these prices for some time, but now cities like Berlin are also breaking through this barrier. A 30-times multiple is traditionally held in Germany to be the level at which little profit can be expected, nor can potential rental income versus financing costs be deemed attractive.

Loudly voicing its concerns about a property bubble since the beginning of this year is market research group Empirica, who believe that residential property prices in the big German cities are 30% overvalued, and will inevitably fall. Its Bubble-Index has risen again since the first quarter by a further 0.03 percentage points, despite fresh housing supply coming on to the market. Only in Dresden has the danger of a bubble bursting increased since last quarter, say the researchers.

Whether – or when - the German bubble will burst, says Empirica, depends on the speed with which new housing is built, the degree of deceleration of internal migration, and a possible change in interest rates.

In the commercial property sector, as we report in this issue and in all recent issues, many owners of German prime commercial property, particularly foreign investors, have been putting their trophy German assets up for sale, to take advantage of the undoubted demand for "safe haven" German properties. The Sony Centre in Berlin and Tower 185 in Frankfurt are just two examples that have increased massively in value over the past few years of record-breaking transactions volume in Germany.

Just this week Fidelity issue a stark warning that European property, particulary prime property in the eurozone, "has all the hallmarks of a bubble". The large scale entry into the market of new groups of investors, including insurers and retail funds, are pushing prices to dangerously high levels, according to Fidelity's Adrian Benedict, real estate development director at Fidelity International.

Benedict said of the new relatively inexperienced investor group that, “Their demands for liquidity could easily collide with a reality of forced sales and collapsing returns, or even investor lock-ins, when the market turns.”  In particular, the search for higher yields compared to bonds makes real estate look attractive for those with a much lower cost of capital than those already long invested in real estate, who are then lured into paying higher prices for lower yields.

At some point the wave of investors buying into funds focused mainly on holding prime property will push prices to levels that no longer compensate for the capital risk involved, said Fidelity. We are close to that level now, it believes.