REFIRE
Charles Kingston - REFIRE
One thing looks sure. The rise of the Greens, and the accompanying pressure on their political opponents to match their voter-friendly social outlook, will require more and more political lobbying from the array of real estate interests to ensure a fair hearing and the overdue reform of the constipated planning and regulatory structures that are in danger of strangling future growth. Not an easy path ahead.
This week we learned from national property association IVD that the rate of increase in rents and housing prices in Germany has actually accelerated over the last two quarters. Prices for apartments, particularly in the larger cities, rose 6% year-on-year, compared to 5% this time last year. But prices single houses and newly-built properties of all kinds also rose strongly.
The price rises have been most extreme in the very biggest cities, those with 500,000 and more inhabitants, where apartment prices have risen 9.4% and family homes by 6%. In Frankfurt and Munich price rises were even higher. We're about to enter the seventh year of steady sizeable price increases – a very rare occurrence for Germany.
Amazingly, given low interest rates and the rising incomes in the big cities, residential property is still described as more affordable than ever. We can see how that might be so if you're one of the many new employees of the European Central Bank looking to buy one of the numerous new apartments that have sprung up close to the Main river in Frankfurt, and where your employer's name is likely to win you a favourable mortgage approval.
But not everywhere are conditions so buoyant for employees – and both rental and purchase prices have risen to the extent that they are being felt in people's pockets. Still, wasn't this the reason the Mietpreisbremse, or rental brake, was introduced by the ruling coalition with much fanfare last year – to prevent rents from rising relentlessly, and to protect the affordability of inner-city living?
Like supporters of communism, adherents of rent controls invariably describe the outcomes of their policies as just 'badly implemented', rather than 'doomed to fail'. We have yet to experience a property market where rent controls have achieved their desired outcome, but there was optimism that the sophisticated and nuanced Mietpreisbremse might at least provide benefits for a small number of tenants – if not for the market as a whole.
A year after its introduction, we can start to draw some conclusions about the effectiveness of the much-hyped rental cap. So far, there has been one – ONE – single case of a tenant in Berlin receiving a positive court decision and a refund of her rental overpayment – prompting Justice Minister Heiko Maas (who introduced the law) to whoop about the "beginning of a paradigm change".
We think the Justice Minister is being both premature and wildly over-optimistic. In the big cities like Hamburg, Munich, Frankfurt and Stuttgart, the actual accomodation hotspots which triggered the framing of the law in the first place, there has been not a single case filed for unfair treatment at the hands of landlords. Even in smaller cities which have experienced heavy net inward migration there have been no cases filed – at all.
The overwhelming evidence is that nationwide, both landlords and tenants are completely ignoring the measure. The assumption seems to be that the local 'Mietspiegel' or reference of comparable rents, is so opaque, obsolete and unreliable as to be completely useless for the purpose of filing a claim for mistreatment by landlords.
With Berlin adding 50,000 net new inhabitants annually, and other large cities like Hamburg and Frankfurt growing in the same proportion, it's clear that the rental brake will continue to be seen as an irrelevance, at best. Justice Minister Maas's party, the socialist SPD, want to toughen up the rules – a measure resisted by their coalition partners the CDU/CDU, who seem to recognise that, with demand so heavily outstripping supply, this form of tinkering at the edges is pointless.
A first comprehensive new study by the ever-active German Institute for Economic Research (DIW) in Cologne shows that at least the damage is being limited, in that the Mietpreisbremse has not yet led to a drop in property investment, as one might have expected.
That would seem to have a lot to do with luck. The ongoing favourable German story means that investment resources are still pouring into the market, while in a heated market, potential tenants are more than happy to clinch an apartment rather than mark themselves out as troublemakers from the start. The market is currently biased in favour of landlords, and an ineffective system of rent control is probably, under the circumstances, a good result.
At the recent Expo REAL in Munich, the overwhelming view was that German prices and rents will likely continue to rise for quite some time yet. The ECB's easy money policy and Germany's role as guarantor of the entire European project means that it is hard to see what will lead to an imminent reversal of the low (or nearly negative) interest rate environment.
There is a strange phenomenon in investing that, as investors climb a wall of worry, there seems to come a point - when prices are so much higher than they were – that the air gets thin enough to believe that there are clear skies ahead and valuations under the new paradigm are now fully justified. At that point it's almost a relief to double up and put it all on red.
Still, conservative commercial property lenders such as Aareal Bank are talking ever more insistently about the lack of attractive new lending opportunities and bubble-like characteristics in the German market. Aareal, Helaba and others are reducing their new lending in Germany in favour of the USA, where they plan billion dollar loan book expansion. Germany, for all its undoubted strengths, DOES have its limits. We may not be there yet, but we're surely closer.
