Germany is Europe’s healthiest economy and has remained relatively immune to the plague of defaults and debt that has swept across the rest of the EU. But a different danger might be facing Germany.
As the economies of Spain, Ireland, Greece and even the USA suffered, investors in property there withdrew their cash and looked for places to invest it. Meanwhile, Germany continued to rebuild swathes of old slum and rubble left over from the days of its division. Foreign business investors built flagship buildings in Berlin, like the €600m Sony Center, whilst local businesses spread into areas that had previously been run down and rejuvenated them driving property prices up in the process. Prices rose about 5.5% nationwide last year, causing German Bundesbank President Jens Weidmann to describe the rate as ‘something we will need to watch’ in a statement.
Stefan Sebastian, head of the Institute for Real Estate Finance at the University of Regensburg, says prices are going up because of ‘fear of inflation and fear of currency reform.’ Kai Carstensen, an economist at the Ifo Institute in Munich, echoes Mr Sebastian’s views, saying that while Germany is in a better position to protect itself against a bubble than the US or Ireland, ‘if we learn from the US experience, we should be cautious, even if we up to now aren’t in a bubble.’ Mr Carstensen points out the commonality of the optimistic belief in being the exception, too: ‘When I talk to politicians, they always say, well, it’s different.’
Many experts think the danger signs of a bubble are in place in Germany; ironically the country could be a victim of its relative stability and prosperity. Unemployment is at its lowest in decades, and interest rates are at rock bottom. Germans are typically not a homeowning nation in the way Americans or English people understand the term. Home ownership in Germany runs at about 43%, but as interest rates make savings accounts look unappealing and loans seem to beckon by contrast, that might be set to change. Whether it indicates a long-term trend or not, Germans are buying more property.
As a result, property prices are being pushed upward by domestic demand on one side and foreign investment on the other. And the pressure isn’t just on existing property. There’s been an upswing in German construction too, with new housing construction permits up 9% between September 2011 and March 2012 compared with the same period a year earlier.
However these two types of purchasers are likely to have very different experiences. German mortgage lenders typically offer much lower loan-to-value (LTV) mortgages than are on offer in the US or even the UK, where 90% or even more LTV mortgages are returning after the 2008 crash. In Germany, a typical mortgage is more likely to require a 20% deposit and as a result these purchasers are likely to ride out a downturn more equitably.
Investments for profit, based on the belief that prices and demand will rise inexorably, are much more problematic both for their investors and for the wider economy if a bubble should burst; indeed this was the very factor that hit the Irish and Spanish economies so hard.
So are investors in trouble in Germany? While some experts claim to see the warning signs of a bubble, others say there’s no cause for alarm just yet. The actual price increase has some local hotspots. In Berlin, prices have risen nearly 20% in the last year, and protests about housing costs and gentrification are common. Overall, though, prices are only 20% higher than they were at reunification in 1990, and the recent rises make up for a long preceding period of stagnation. Ulrich Kater, the chief economist at Deka Bank, rejected the idea of a bubble in Germany: ‘If you define a bubble as the price is only high because investors believe that prices are going to be higher in the next year’,’ he said, ‘then you have no bubble in Germany.’