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German Property Market Flourishing Not Bubbling

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German Property Market Flourishing Not Bubbling

By - Thursday 18 October 2012

German property sales and prices are soaring and again, as happens so often to outperforming markets in the post-crash era, some supposed experts are voicing their concerns that the German housing market may be bubbling in places.

According to a recent report by research company F+B the average sale price of homes in Berlin has increased by 23% over the last five years. Jones Lang LaSalle, a property consultancy, estimates that median prices in Berlin have risen even more sharply: 20 per cent in the 12 months to June, and 37.5 per cent since 2009.

For the latter, this is incredibly strong growth by anyone or any market's standard, except Germany and especially Berlin.

Since the crash erupted bubbles have been on everyone's mind and many markets, most notably China but also Switzerland and others have taken action to cool down price growth so as to avoid the possible formation of a bubble after runaway price growth. But Germany was one of the only property markets where price growth was regulated by the government long before the crash, albeit effectively regulated rather than actually regulated.

Let me explain: Germany has one of the highest proportions of people renting their homes as oppose to owning, and Berlin has one of the highest proportions of renters within Germany. In order to prevent people from being priced out of the rental market, the government regulates rent rises in line with wage growth. Because most buyers in the market are buy to let investors targeting the rental market, this regulation of rental rates effectively regulates sale prices in the market.

This tacit regulation has effectively kept a lid on growth in the German housing markets for going on 2 decades. Rents have been allowed to grow when the economy is growing, and only inline with wage growth, and even when the market has seen popularity with foreign buyers still the long-awaited long-predicted house price boom never came. If we use over-valuation of property as  a measure of a housing market's health, Germany has long had one of the healthiest property markets in the world. Indeed, by many standards German property has been well undervalued, especially given that construction is and has also been very low in the country.

So, prices may be growing stronger now than they have for years, and faster than economic growth would seem to support. But because of the decades of weak price growth, the market has a lot of room for growth before we need to worry about a bubble.

Indeed most experts disagree that there is any risk of a bubble at present, pointing to several factors that sustain higher prices, including lower interest rates, a robust jobs market and the catch-up from a long period of stagnant prices. They also point to the fact that while growth is currently strong for Germany, it is still weak by comparison to other markets during the boom.

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