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).