“Is Germany drifting towards a real estate bubble?” – in his latest blog entry, German business economist Prof. Dr. Hartmut Walz answers this question with an immediate “no”. Through several conditions, he elaborates why that is:
Strong increases in interests could not to be expected – for demand, it’s different
Interests within the Euro zone are still on a low level. A possible push up in the near future, for example through the EZB’s “homeopathic interest increase” would be unlikely. Walz justifies that through the fixed interest rates, which, when applied in autumn of 2019, could have no influence on the real estate market due to their long terms. While property prices in conurbations rose with decreasing speed, regional overheating and speculative exaggerations in metropolises like Munich, Frankfurt or Hamburg wouldn’t have a nationwide potential. Properties would therefore not be generally, but only punctually rated too high.
Fundamentally however, there is a housing shortage in Germany. Thus, almost every new building would face a true, strong demand – so that the majority of these projects couldn’t be considered speculative, but demand-meeting.
The credit approval process is monitored much stronger
The accommodation of a loan couldn’t be described as reckless either. Solely a modest number of participants on the market would carry out aggressive financing operations. In the course of that, there would be only a few institutes that would loosen up their lending standards. If, however, this situation becomes widespread, the Federal Financial Supervisory Authority (BaFin) with the head Felix Hufeld would intervene accordingly.
Through political decisions in 2017, this authority acquired extensive power for control and regulation in order to counteract overvaluation through dropping lending standards and excessive increases of lending practices. Instruments are for instance an information obligation for the banks towards the BaFin, the applicable obligation to place funds to additional capital buffers against risks and the opportunity to preventively decrease the lending capability.
… but the credit rating is fundamentally good
Fundamentally, writes Walz, property financing would be hedged by at least 15 – 25 percent of equity capital. By doing that, investors could carry a sufficient share of price change risks by themselves. The danger of strengthening a market’s downward movement through the disposal of housing properties could not be expected in Germany either. This disincentive happened most recently in the US, when property prices dropped.
Price setbacks or a wave of repossessions could not be expected here, however. Walz considers diminishing price buoyancies or prices reaching a plateau as much more probable in the near future. A price drop in these “hot spots” would only happen slightly, since these properties would be bought up again instantly. In case of excessive prices in these areas, the author advises his readers simply not to follow.
Price development is relatively natural
Regarding the common trend of strongly rising prices in recent years, there is an “all-clear” signal as well. This development could be qualified when considering that property price development has been under the common inflation rate for many centuries after the second world war. With that, recent developments could be merely considered a “jerky correction reflex after a long underperformance of this asset class” in “Germany’s economic miracle”.
This page is also available in: Deutsch