Empirica sees construction dampening 'overheating' fears

The independent Berlin-based research company empirica has just published a report looking at the risk of regional house price bubbles across Germany. While sounding a note of caution for certain cities, the report concludes that the level of new construction is helping to dampen the risk of irrational house price rises, while reflecting people's wishes to live in popular urban centres and pay a premium for doing so.

Empirica's latest index report concludes that, in 124 of the 402 German municipalities surveyed, the threat of a house price bubble is indeed high, rising from 110 in 3Q15 and from only 33 three years ago. In 199 municipalities, rents and purchase prices rose in 4Q15, up from 189 the previous quarter and 99 in 2012. It registered excessive new construction volumes only in 14 municipalities.

Despite the rapid rise of house and apartment prices in Germany's Big Seven cities, empirica says there is still little danger of price overheating. Although traditional measures of annual multiples and price/household income ratios have shown big leaps, these are countered by rising construction activity, while such cities can generally command a premium on general attractiveness and job-market grounds.

Empirica does raise its red flag for a number of named cities, such as Bayreuth, Landshut, Regensburg, Trier, Weiden/Oberpfalz and Coburg. Although swollen by growing numbers of enrolled students, they are unlikely to sustainably be able to hold on to all their graduates, and may not be able to justify their high multiples, price-earnings ratios, and level of completions, say the researchers.

Separately, a new market analysis published by Commerzbank, Germany's second biggest bank, is more critical of the level of house price rises particularly in Germany's biggest cities, where it identifies signs of overheating. However, it sees the trend of rising prices continuing through 2016, despite warning signs.

The Commerzbank study says that house prices rose in Germany last year by nearly 5%. In Hamburg, Cologne and Munich apartment and house prices rose by 10%, while Frankfurt and Berlin saw rises of 13% over the previous year.

Housing prices over the last five years have now risen noticeably faster than rents and incomes – in the case of incomes, house prices have risen nearly a third faster than household income, which Marco Wagner, the author of the Commerzbank study says is, "without question, even without a historical comparison, a property market that's showing clear signs of overstepping itself in the major cities." An example is Munich, where last year households were paying 7.6 times their annual average income for a normal 80 sqm apartment.

Commerzbank points to data from the Bundesbank showing that provision of mortgage credit has risen 4% over the past year, outstripping private household income, which rose 3%.