Prices still rising, ‘bubble danger’ in new-build sector

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Figures just issued by the German Association for Pfandbrief Banks vdp (Verband deutscher Pfandbriefbanken) show that prices for German residential and commercial real estate continued their climb in the third quarter, with the prices for multi-family homes leading the growth at 7.2% in 12 months over 12 months. The vdp figures are often used in German banks and financial institutions for valuation and risk benchmarking.

In its latest index report the vdp found that owner-occupied home prices rose by 3.1%, while offices gained 3.7% and retail 3.9%. The overall German property index rose by 4.8%. “German residential and commercial assets remain in demand,” said the association’s managing director Jens Tolckmitt. “The very low interest rate level as well the associated search for attractive investment returns are supporting this trend.”

The residential price index rose by 5.2%, higher than the overall growth rate in the second quarter, while commercial growth slowed to 3.7% from 4.8% in 2Q14, mainly due to a slowdown in the office sector. Rents for new residential leases rose by 4.6% on 3Q13, those for offices by 1.8% and those in retail by 1.1%.

Germany’s prestigious DIW Deutsche Institut für Wirtschaftsforschung issued a report saying that there is increasing evidence of a property price bubble developing in newly-built apartments, and particularly in the more popular university towns across Germany. Of the 127 cities analysed by its researchers, the danger of overheating is not so much in the larger cities but in about 40 smaller towns – it singles out Detmold, Siegen, Moers, Paderborn, Ludwigshafen, Landshut and Coburg as towns whose new-built sector has been rising at more than 9.5% annually for the last four years, and far outstripping the rise in local rents  In only nine cities do the researchers highlight a bubble danger in the existing homes sector.

In other words, DIW sees no real indication of a general price bubble using ‘average’ prices. At the recent CIMMIT Conference in Frankfurt, now taking place in November instead of its previous slot in January, Deutsche Bank’s Jochen Möbert noted that the trend away from the land and into the cities is a fairly new global phenomenon, and conventional bets are now off. Never before have so many people lived in cities, he said, and the urbanisation trend continues. This means high prices may actually be founded on sound future fundamentals. “We have to take into account that we are facing developments across the globe that we have never seen before, and thus have no models to predict what is going to happen,” he told the CIMMIT conference.

At the same CIMMIT event, only Stefan Kooths of the Kiel Institute for World Economics IfW was taking a more sceptical view of where the German market stands. “A flight into property due to a lack of other alternatives is not a sound fundamental development,” he said. “We should also be wary of hiding behind averages since there has never been a house price bubble across a whole country.”

Meanwhile a further research institute, F+B, which produces and monitors a residential pricings index based on local acceptable rent tables or Mietspiegel, confirms that the average rent or Mietspiegel rose last year by 1.7%, higher than the previous year’s 1.3%. Munich remains the most expensive large city, with an average of €10.32 per sqm per month for ‘cold’ rent, a full 64% above the average rent (Mietspiegel) of €6.28. Of the biggest cities, Munich is followed by Stuttgart (€8.24, 31% above the average), Cologne (€7.97, 27%), Frankfurt (€7.90, 27%), and Hamburg (€7.70, 23% more than the average).

In eastern Germany, the bigger cities of Erfurt, Rostock and Jena, which rank from 78 to 93 on F+B’s 337-city list, reflect about the average rent of the surveyed cities with ‘rent tables’ or Mietspiegel, at €6.10 to €6.20. Other eastern German cities were Potsdam at €5.94, and Schwerin and Dresden at €5.62 and €5.48 per sqm.