German residential prices set for further steady rise through 2014

Residential prices in Germany are expected to continue their upward trend through 2014, with prices for newly-built apartments expected to rise by up to 5%, according to a new study from the University of Regensburg and commissioned by Deutsche Bank. Single-family house prices could rise by 3%, says the study, entitled “German Residential Real Estate as an Investment”, which says the markets is showing many characteristics of a boom, but not an inflationary bubble.

The rise in prices is viewed by the study’s researchers as a ‘normalisation’ of the market. According to Jochen Möbert, real estate analyst at Deutsche Bank, “The prices for German residential property in 2013 were still well below the level in real terms that they had reached in the mid’90s.

With rising incomes and falling interest rates since the, financing property for private households is still very affordable for Germany as a whole, although less so in the larger western German cities and Berlin. Tobias Just of the University of Regensburg sees a number of demographic, economic and financial causes for what he calculates is a 3% annual price rise for houses and apartments since 2008. Higher levels of employment, lower interest rates, inward immigration, and a more pronounced trend towards urbanisation have underpinned the price rises, along with general uncertainty on the financial markets which has increased the appetite for real estate.

Jochen Möbert at Deutsche Bank says the absence of looser credit issuance, overheating in the economy or a widening gap between rents and purchase prices – all typical characteristics of a property price bubble, provide further evidence of a still stable market. “the real rate of growth of credit in Germany is still very moderate, and we’re a long way away from the sort of price dynamic we saw in southern Europe or the USA before the crisis.”

Real estate industry lobbying group ZIA came to the same conclusion at the presentation earlier in the month of their annual “State of the real estate industry” report to the government in Berlin. The ZIA (Zentraler Immobilien Auschuss) sees rents having risen 3% in 2013, purchase prices for apartments by 3.5% and for single-family houses by 4.3%. In ZIA’s view, the price rises were based on higher demand and were contained to particular regions of the country. A major rise in actual new building completions – another likely symptom of a potential bubble – failed to materialise.

The study does concede that major regional differences are clearly discernible, however. While rents will rise by 3% in Germany as a whole, it will be much higher in the big cities. Munich is expected to rise by 6.9%, Berlin 6.6% and Cologne 4.5%.

That house prices experienced a surge in 2013 is not in doubt, and recent figures released by the VdP Association of German Pfandbrief Banks put the price rises last year as the highest in ten years, with low interest rates making it cheaper to buy, and investors prompted to switch from bond markets into the real estate sector.

The VdP figures put the price increase for houses, apartments and residential building at 4% for 2013, albeit with a slowing tendency in the final quarter. This makes it the biggest gain since 2003, when the VdP first started compiling its data. “Demand for residential properties remains high,” said Jens Tolckmitt, VdP’s general manager, in a statement. “Large cities and university towns continue to be at the centre of attention.”

Owner-occupied condominiums gained 4.9% and apartment buildings rose 4.7% in 2013, driven in part by a 4.2% rise in rents paid on new leases, according to the VdP data. Single family-homes had the slowest gain, at 2.6%. VdP’s office-price index rose 5.9%, less than the year-earlier increase of 6.1%. Office prices are being pushed higher by institutions seeking higher returns amid low yields in fixed-income markets.

The Pfandbrief bank association gathers its price data from mortgage contracts signed across Germany by its 38 member banks, all of whom can access the refinancing markets through the issuing of Pfandbriefe. This can lead to variations from other indices, which tend to focus on prices achieved only in Germany’s largest urban conurbations.Meanwhile, Germany’s Bundesbank, which set the cat among the pigeons last October when it said that German house prices were 20% overvalued, only to later qualify their statement to calm the ensuing storm, issued a further statement in their February monthly financial review when it claimed that prices in German cities are 10-20% overvalued, and up to 25% overvalued in the largest cities. Looking at the overall market, however, it sees no deviation from long-term fundamental data or the build-up of macro-economic risk. “There is currently also no evidence for a destabilising interdependency between property price growth and lending on a macroeconomic level,” it said soothingly.

The bank’s report also refers to the supply of new housing helping to alleviate previous bottlenecks. While in 2012, about 177,000 new apartments reached the market, the figure for 2013 will come in higher as a lot more permits were issued - 235,000 compared with 210,000 in 2012 and 200,000 in 2011. While a step in the right direction, the new supply will not satisfy demand however, the Bundesbank warned, since 260,000 new apartments are needed annually to close the gap.

It sees regulatory intervention on the housing market – in the form of the new measure being introduced by the coalition in Berlin to set a cap on rental increases (the Mietpreisbremse) – as counterproductive. Demand is also boosted by low interest rates, with the average effective annual interest rate for residential loans falling to 2.75% last year – albeit with banks slightly tightening lending conditions since then.