Back in 2011, I wrote a detailed article, How Germany achieved stable and affordable housing, which compared and contrasted the UK and German housing markets, and argued that Germany’s housing system was amongst the best in the world because of the way that it:
- allowed housing supply to adjust responsively to changes in demand;
- provided secure rental tenancy; and
- restricts housing credit via conservative limits on loan-to-value ratios.
Certainly, the German housing system was highly successful in avoiding the excesses of the Global Financial Crisis. In fact, according to the Bank for International Settlements (BIS), Germany was the only European nation to experience negative real house price growth since the 1970s (see below chart).
The situation in Germany could, however, be changing, with concerns rising about a potential housing bubble, whereby a flight-to-safety from the euro-zone crisis is tempting both Germans and European foreigners alike to plow money into German real estate.
A recent article in Spiegel Online explains some of the dynamics at play in the German housing market:
The exploding costs and dwindling supply of urban housing are slowly pushing Germans of average means out of the cities. As September’s national election approaches, politicians are jockeying to find viable solutions to a problem they helped create…
When Jacopo Mingazzini’s customers step off the plane in Berlin, they like to mix business with pleasure. First, the real estate broker’s employees chauffeur the Italians to the city’s top tourist attractions. Then they take the visitors to Wedding, a residential area in Berlin that is central if not particularly chic.
The potential buyers are on a tight schedule. Mingazzini’s employees sometimes show them up to five apartments a day. The negotiations are conducted in Italian, and demand is high. Of the 1,200 apartments Mingazzini has sold this year, 150 were bought by Italians seeking to invest their savings in German real estate, which is seen as crisis-proof. “They know full well that if they buy an apartment that’s currently being rented for €5 ($6.60) a square meter (about $0.60 a square foot), they can charge a lot more on a new lease,” Mingazzini says.
The surge in demand for housing in Germany has reportedly led to strong rental growth, with rents in Berlin ‘surging’ by some 20% since 2007, making housing affordability an election issue in Germany:
The method being used by Italian teachers and lawyers to protect themselves against the euro crisis is causing turmoil in Germany’s capital. Berlin’s housing market is going haywire as local rents explode. Since 2007, average rents in the western part of the city have gone up by 20 percent, and other major cities are now experiencing the same development…
The fight against what has been dubbed “rent shock” is forcing its way onto the political agenda. Germany will hold national parliamentary elections in September 2013, and no party wants to be accused of not taking voters’ concerns about housing seriously. About half of German voters rent their houses or apartments. And even those who own their homes have often heard stories from family members or friends about skyrocketing costs, brazen brokers and overpriced hovels…
The message the parties are trying to convey to voters is that they are taking a proactive approach. But, in reality, there is plenty of hypocrisy at play when politicians suddenly discover a soft spot for renters — especially since they are largely responsible for the price explosion on the real estate market themselves. Indeed, more than anything else, the government is driving up costs in the rental market, and at all levels.
Since the European Central Bank (ECB) has pushed interest rates down to historic lows, money for development is cheaper than it ever has been. At the same time, Southern Europeans seeking a safe haven for their assets are moving them to Germany. Rising demand drives real estate prices up and leaves renters in Germany with the bitter realization that they are paying a significant share of the added costs resulting from the euro crisis.
As an aside, it is interesting that the purported 20% increase in rents over five years has become an election issue in Germany, when over a similar period (2006 to 2011), rents in Australia rose by a whopping 50%, according to the Census, without much protest from Australian politicians or the media (see below chart):
Sadly, it seems that Germany’s once responsive housing supply is becoming less so, as officials have slowed the rate of land release and development approvals, and are increasing land-banking for sale at exorbitant prices to developers:
Many municipalities are also pushing up property prices and development costs by limiting the amount of land zoned for residential purposes and allowing sluggish bureaucracies to slow down the permitting process. Likewise, almost all of Germany’s 16 states have scaled back low-income housing construction and are adjusting the property transfer tax. In the western states of Baden-Württemberg and North Rhine-Westphalia, for example, the tax recently rose from 3.5 to 5 percent…
…the government in the southwestern state of Baden-Württemberg, led by a coalition of the SPD and Green Party, unveiled its plans for an amendment to the state building code in early December. Under the proposed new rules, new developments would have to provide more space for bikes — even on properties where there is no obvious need for such space…
…city and town officials [have also been accused] of hoarding land available for building and only selling it to investors at exorbitant prices. In fact, there has been a sharp decline in the number of residential building permits issued in recent years, from 639,000 in 1995 to 228,000 in 2011. In addition, Pfeiffer claims that local authorities are imposing unnecessary but costly conditions on developers. “In the end,” he says, “all of this affects rents.”
While it is clearly far too early to suggest that German house prices resemble a bubble - given prices are still well below 1970s levels in inflation-adjusted terms (see below chart) – and rental increases have only been modest by Australian standards, the German housing situation bares watching as another experiment in the role of supply and the appropriate policy settings that govern it (and prices).
I’ve said it before and I’ll say it again. “The Unconventional Economist” at Macrobusiness Australia is the world’s number one source of information about housing affordability and cyclical volatility.
Others do important work limited in scope to, say, the USA or to “the Anglo world”. Only Leith Van O is eager to get every bit of helpful information from anywhere and everywhere, in front of his readers.
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+ ∞
░░▒▀▄▀▄██► UE ═ smart cookie! ◄██▄▀▄▀▒░░
Yep! +1
Exactly
+1
The fact that most Germans don’t have variable home loans but fixed 10 year loans (at today’s very low rates), together with low unemployment would certainly put upward pressure on housing too. But I wouldn’t bet on an Anglo-American type experience here. As I sit writing this my thermometer say -8 with Real Feel -17. The culture is different here. Housing is seen as a fundamental human need not something to be speculated on. Berlin is a little special. It was coming off a remarkably low base and being the capital attracts a lot of foreign investors. I don’t think the Berlin experience will be repeated in other parts of Germany. There will be a lot of pressure on politicians to keep prices affordable.
I agree -Berlin’s real estate bubble is special within Germany I think. The huge amounts of foreign investors and and the government moving the bureaucrats from Bonn have created a speculative market particularly in the centre of City (Mitte, Prenzlauer Berg). Everyday Berlin wages have always been much lower than say Munich and the rents reflected this.
I stayed with my old flatmate in Berlin this August and he has been in the same flat in Mitte for over 10 years. The building is owned by AIG. Right across the road the German CIA are building their huge new complex. He is paying 800 euros a month for a 2br duplex – it has gone up 100 euro since I lived with him in 2005. He was complaining about the noise and was thinking of whether to ask AIG to lower the rent because of the construction. He has no intention of ever buying or moving if he can help it. He has been able to make changes in the apartment (changed the floor from carpet to poured concrete) and he doesn’t feel like a renter. If you are able to treat your rented apartment as you would a purchased apartment then there is no obsessive drive for ownership.
This may reflect more about the Euro than the German housing market.
If you have the means to, buying a house in Germany might be good protection if the Euro collapses.
A bit like the Hong Kong Chinese did before handover and the mainlanders are doing now.
If worse comes to worst and the Euro goes belly up you can sell or take off and live in your German asset which will be nice ‘hard currency’.
A Swiss bank account you can live in.
If the Euro does fail and everyone bolts to live in Germany – the freedom of movement law in Europe will come under immediate strain.
Pointless to decry locals here in Oz who making shelter unaffordable for other citizens, then do the same to the poor bloody Germans!
There has to be a limit to selfishness.
Invest somewhere else. Try precious metals!
There is no limit to selfishness. The race is on to be part of the new debt feudal world – begger you neighbour.
The “if you” was a reference to Europeans living outside Germany rather than Aussies.
But I would not be too worried about it happening for long. The Germans will not tolerate for long their housing being bought in bulk by foreigners (fellow EU members) let alone the foreigners actually moving in and taking German jobs.
The EU freedom of movement is premised on the idea that due to ‘cultural’ differences mass migration between countries is unlikely.
However, economic flight may be something on the horizon for Europe and that could shift the debate on the future of the Euro from Brussels to the streets.
+1
UE
I have been going to Germany on business for about 25 years and I can tell you that in 1988 at then prevailing exchange rates Munich property was about twice Melbourne per square metre or per land unit. Then over the 20 years to 2007 Melbourne property went to twice that of Munich (at prevailing exchange rates). This was too much for me and so I bought an apartment for 180,000 euros in inner Munich. It is now about 400,000. My German mates all said in 2007 that no one buys and they all rent as the landlord/lady takes care of everything. At that time interest rates for borrowers were about 4% and rental yields were 7%. (I did not rent mine).Is that a bubble? However, on recently talking to an inner Melbourne apartment developer his much inferior product was the same price per square metre as my Munich apartment (at current exchange rates) so maybe German property was in a depression after the 1994 Berlin property bust.
Or post unification the property market was simply going through a funk stage that warped the reality of it and led us to draw incorrect conclusions.
You will recall the huge number of former communist citizens that suddenly became citizens of a democracy and the transition didn’t go well for a long time.
I don’t think that we were looking at a normal market in normal market conditions.
You could replace Germany with Switzerland, which has similar housing policies. Prices have also been remarkably stable there too (see above BIS chart).
‘Swiss, house and affordable’ are not words I’ve heard anyone utter in the same phrase. In fact when last there lack of affordability was a pretty hot topic for the young guys.
That chart seems incongruous.
Well I won’t risk trying to become a 5 minute expert on house prices in Switzerland, but stable and unaffordable are not necessarily two incompatible outcomes.
Do you have any data on prices?
There is a tidal wave of debt washing around the globe that is laying waste to the idea that housing has any purpose other than financial speculation.
It certainly appears that past plans and tools to avoid the chronic urbanisation of our beautiful places cannot survive in the face of the contrived shortage that this endless debt brings, and in many cases just feeds right into it – a rent seekers dream.
It seems we just accept more unfettered development, more endless urban desertification, more ghettos of soulless towers, more brutal developer lead destruction of our places with history until the wave loses power. But this wave feels like the tide, washing around the planet and never losing energy, powered by the moon that is the endless growth politics.
aj, you need to read a bit of Frank Lloyd Wright – and look at some photographs of his work. He complained that people never give proper architecture, at low density, blending in with nature, a chance. Everyone conjures up mental images of the worst of the planned high density urban areas and transfers it straight onto their pristine wildernesses.
FLW even argued that skyscrapers, where regarded commercially necessary, should stand singly each in their own parkland surroundings with all tenants enjoying a magnificent view, not clustered together forming “sunless concrete canyons”.
The entire world population could fit in Southern USA with FLW’s ideal of one acre per household.
Big fan of flw. Big fan of limiting how small block sizes can be in some urban environments and enforcing more parkland. Big fan of keeping developers on a tight leash where supply constraints (artificial or environmental) mean they will do whatever they can to create pointless density – eg holiday houses.
Cairns in qld is a great example of where you would tear you hair out. The artificial land use constraints (benefitting only the land bankers) has managed to turn what would have been a magnificent place to live into a disaster of dog box sized blocks that has completely rooted the natural amenity of the urban environment in new developments.
Developers are all paying so much for land under the conditions of growth containment planning, that every square foot not actually sold to a customer is significant; and the cost that has to be built into the selling price of the parcels actually sold, is significant.
It really makes a huge difference in US cities with pretty much a free market in development, when the land has been bought for $10,000 to $50,000 per acre (the latter being really prime stuff). This is chicken feed in the context of the total cost of development and the cost of the buildings. Developers are keen to maximise the “amenity” of section sizes, road widths, public green space, and so on, because the value sacrificed can be more than recouped in the prices of the finished developed building/land parcels because of the amenity effect and the general “class” of the development.
But in nations where the land is literally “racketeered” under planning quota schemes, the developer has usually had to pay hundreds of thousands of dollars per acre, and even millions. This is why sections are so darn expensive; most of the cost is actually “raw land”. In affordable US cities, a section for $30,000 to $50,000 (yes, not a typo) is almost all “cost of development”. The fact that the same section (actually, SMALLER, in most cases) in a growth-constrained city might be $300,000, is almost entirely due to the massive difference in the original purchase price of the land.
And it really, really matters whether the developer can turn 50% of the land that he paid so much for, into finished product, or 60%; or 70%. Every 10% sacrificed to “social” use rather than saleable private use, forces up the cost price to the developer, of the saleable bits, by some tens of thousands of dollars per acre.
This is the explanation why a developer would be desperate to keep unsaleable space in his development to a minimum, which is totally the opposite of what developers like to do if the land is as cheap as it should be.
It would take too long to describe now, but “freedom to develop” is actually far more efficient in the long run, even if development occurs in a “splatter” pattern beyond the existing urban fringe, and infill later. “Planning” a contiguous “carpet” expansion of the city fringe, has numerous unintended consequences that are utterly destructive of efficiency and equity.
When the wall came down in the 90s, Germany not only stumbled upon a vast new supply of cheap property from behind the curtain, but a vast pool of cheap unskilled labour. It is not surprising that Germany was the odd one out in Europe as far as property prices. I think a little more kudos should be given to the markets rational pricing of a plentiful asset than purely great Government policy. Rising property prices is probably signalling that the reunification is finally gaining traction and I would say it is only just beginning.
West German house prices, which are shown in my post, fell for a decade prior to reunification.
With respect,it is possible they could have levelled out after that fall without the reunification.
And they would still be flat relative to 1970s levels…
I disagree. Germans believe in social democracy. They know what comes from social inequality. Think great depression-weimar-nazi nexus. They believe the market is there to serve people not people markets. America has forgotten that, we are on our way.
Correction: coastal USA has forgotten that. 200 out of 260 cities in the annual Demographia Reports, have never had a housing affordability problem.
African-American home ownership is high in the allegedly “racist” Southern States where housing is affordable thanks to liberal development policies; and hopeless in the socialistic utopia States like California where they claim to “care”. The great African-American economist Thomas Sowell has written an essay called “Green Disparate Impact”, on this subject.
I agree. But my point was that in Germany it wasn’t markets that kept housing affordable but realistic government intervention.
Government intervention in the US led to a bubble while government intervention in Germany has kept housing affordable. I am results oriented. If markets achieve the desired result then fine leave them be. But if they don’t then the government should intervene. Markets aren’t there to serve themselves but the good of the people.
I remember practically all economists criticised the Malaysians for placing currency restrictions (which prevented a run on the MYR) during the Asian financial crisis. Other countries which didn’t suffered greatly and took longer to recover than the Malaysians. Or at least that is my understanding. I think the ‘recalcitrant’ was still in charge or pulling the strings then. Better recalcitrant than sorry I guess.
and no doubt with the lift in general incomes in Germany, the reunification well bedded down, Euro QE infinity with no effective Bundesbank, that property ownership as a store of wealth and protection from inflation is a considerably wise choice.
it is interesting that the purported 20% increase in rents over five years has become an election issue in Germany, when over a similar period (2006 to 2011), rents in Australia rose by a whopping 50%, according to the Census, without much protest from Australian politicians or the media
I can only blame it to the ignorance of general public and conspiracy of MSM and FIRE industries to maintain their fat incomes. Too bad this great country with so much potential in terms of natural resources is populated mostly by ignorant b****s who don’t know and exercise their political rights.
That, and the media’s cosy relationship with the cafe society vested interests in urban planning.
Germany has had anti-speculation laws for oveer 70 years.
Land tax – Rates range from 2.6% – 6% with the average for residential property standing at 3.5%.
Property Taxes (Grundsteuer)
Real estate tax is levied on real estate in Germany. The tax base is the assessed value of the property. The basic tax rate is 2.6% to 3.5% for Western federal states, 5% to 10% for the Eastern federal states, and 6% for agriculture and forestry.
and now we are getting to the bottom of why German house prices underperform.
1861 thee Germans introduced their first land tax
http://www.fig.net/pub/fig2012/ppt/ts05g/TS05G_karl_5766_ppt.pdf
http://www.fig.net/pub/fig2012/papers/ts05g/TS05G_karl_5766.pdf
Background
http://arno.unimaas.nl/show.cgi?fid=610
Tks WN – there just seems to be a lack of recognition that speculation in RE is pointless and unhelpful. In Aus we are addicted to it – all the chit chat rarely questions the role of speculators.
Speculation has changed and is now, I think the majority now that a far more considered approach when it comes to residential property.
Capital gains are not assured anymore.
Speculation on commercial is different, productive and not likely to effect the average family wanting to buy a home.
Germany, with its aggressive Land Tax, transfer tax and CGT tax have kept a lid on house price growth. In Germany, you get rental tenure for life and the majority of renters also invest into the mutual funds that own the housing stocks.
What anti-speculation laws did do it divert capital into productive areas of the economy and Germanys economy is certainly productive.
Germany has a very intelligent mix of policies. Their elasticity of supply has been part of this. But I am among those who worry that the system could be swamped by international investors.
I really liked this earlier comment; I think Pfh007 is right about the Germans
Pfh007 January 22, 2013 at 7:54 am
“…..I would not be too worried about it happening for long. The Germans will not tolerate for long their housing being bought in bulk by foreigners (fellow EU members) let alone the foreigners actually moving in and taking German jobs. The EU freedom of movement is premised on the idea that due to ‘cultural’ differences mass migration between countries is unlikely. However, economic flight may be something on the horizon for Europe and that could shift the debate on the future of the Euro from Brussels to the streets…..”
CAPITAL GAINS
If the property was held for more than ten years, gains incurred from the sales of property do not attract capital gains tax.
Otherwise, capital gains realized by an individual from the sale of property within ten years after acquisition are taxed at the standard progressive income tax rates plus solidarity surcharges. Acquisition costs and improvement costs are deductible from the selling price when computing taxable capital gains.
That capital gains tax is paid by private citizens on all property.
and so it ought to be
Gunnamatta
Correct.
1. Land tax on all property.
2. CGT on all property sold under 10 years ( exemptions for health, work or babies – legitimate reasons to move). No CGT for anyone if sold after 10 years.
3. Abolish stamps.
4. Rental pricing regulations so mining and natural disasters does not send rents to the moon.
5. Reverse mortgages supplied by Centrelink, for those who elect to accrue the land tax.
Rising house prices, well above the cpi or wage growth, is not desirable to an advanced society.
Just so people have an idea of what you get in Berlin at least, and a Spiegel article from mid last year about rising house prices
From a post on the Demographia thing yesterday
They are terrified they have a Real Estate bubble…(but the prices they are talking about are well south of here)
http://www.spiegel.de/international/germany/german-real-estate-market-soars-amid-euro-crisis-a-838437.html
For those German Real Estate prices you may want to check out
http://www.rubinarealestate.com/en/find-a-property
http://www.frontlineberlin.com/
Yes, safe money back into German property has driven up prices. Well then they collect more land tax, good.
I do note the article you linked mentions Germans declining population. Once again, proof that population growth, or decline does not drive house prices.
The funny thing is, here in Aus, if house prices aren’t rising it becomes an election issue. Sad.
But they should rise with the cpi or wages growth. Problem is they need to fall over time by at least 30% to revert to the mean.
Hell, prices on housing should drop below cpi or wages growth. Property is strictly a non-productive asset, and therefore, should be as dirt cheap as possible with regulations that give absolutely no room for speculation.
Then like you said, the extra resources can be diverted into more productive area.
Until all our politicians no longer own investment properties, I guess this will never happen.
“…..Property is strictly a non-productive asset, and therefore, should be as dirt cheap as possible…..”
Hear, hear.
Adam Smith had this worked out way back in his classic “The Wealth of Nations”, 1776. He stated that “dwelling places” are merely a necessary expense like clothing – they just take longer to wear out than clothing.
http://www.macrobusiness.com.au/2012/04/melbournes-enormous-property-over-supply/#comment-142944
I didn’t realise at the start of this thread that rents are strictly controlled in Germany. Landlords are prevented from increasing rents or as miw from elsewhere put it:-
Rent controls mean that once you get into an apartment you stay there, because rents did not keep up with inflation while you were in there. On the other hand, your landlord had every incentive not to spend a cent on the place, because if you got pissed off and left, s/he could put it on the market at a higher price and have a hundred applicants the next day. (There was a terrible housing crisis in all the first-tier cities except Hamburg at the time.) The only way to get rid of a tenant was to piss them off so much they left. As a result, people do all the maintenance and painting, etc. themselves. You are required under the lease to replace the wallpaper yourself at certain intervals as well. If there is something that you can’t fix, like water leaking from the hot water system, then you had to notify the landlord and if, as expected, they did not fix it, you went to court and applied for rental reduction based on loss of utility. When I asked these people why they didn’t buy their own apartment, they looked at me as if I was crazy. They could have afforded it without too much trouble. But people don’t buy their own apartments in Germany.
A little cross pollenation from another unmentionable website.
Because of that, when we look at Germany we are simply not looking at a free market in any sense of the term, it’s a heavily restricted market, and due to those rent restrictions we will one day see one almight blow out in their market as supply of apartments can’t keep up with demand due to low returns over decades.
rent restrictions we will one day see one almight blow out in their market
I’m sure the 125 million homeless people in Germany are gracious you’re coming to save them Peter.
Mmmm. but their population is shrinking and will continue to shrink. According to the spruikers, less people, less demand, falling prices over the longer term.