Andreas Dombret, German central bank executive board member, said he dismissed fears of a German property bubble in comments published in Saturday.
‘A panic is not justified,’ Mr. Dombret said, in comments published by business weekly WirtschaftsWoche. ‘Even if there are signs of an exaggeration in preferred areas of some German metropolitan areas, one should not speak of a real estate bubble.’
Mr. Dombret’s comments are a response to fears that rising prices in Germany’s major cities, especially Berlin, are the beginnings of a bubble. Voices like the Financial Times’ and Economist’s began to be raised in the fourth quarter of last year, suggesting that Germany was facing a potential bubble. Reports of Berlin’s house prices rising by 37.5% since 2009, while other Eurozone prices fell, sometimes by as much as 50%, appeared in the Financial Times. Property consultancy Jones Lang LaSalle reported last year that Berlin’s house prices had risen by 20% in the year to June 2012.
Low interest rates, instated to aid recovery, are thought to have tempted some Germans into the property market, which is normally sleepy in this low-ownership country. At the same time, investors rather than purchasers are thought to have been tempted into the property market as protection: a lower income, but a more certain investment, and a safe place to put capital during the economic crisis. ‘The flight into supposedly safer assets such as property is being reinforced by the lack of investment alternatives,’ according to Stefan Mitrolpoulos, an analyst at German bank Helaba.
Foreign buyers are also inflating the German housing market, and Anne Riney, director of the Berlin-Mitte office of estate agency Engel & Volkers, reports high investment from ailing Italy and Spain as well as the Nordic countries. ‘People are afraid to have their money in the bank,’ he says,’ and Germany is the most stable economy in Europe.’
Germany’s inflation rate has remained above the ECB’s Eurozone target of below 2% for much of 2012, as its economy outperformed European peers. Germany’s buoyant economy has fuelled robust wage rises, and house prices have risen too, well above the rate of inflation; in 125 German cities, house prices rose an average 5.3% compared with the previous year.
In large part, Mr. Drombret’s comments echo a September 2012 Deutsche Bank report which assessed the risk of a price bubble in German housing. The report stated that the price rises in housing had not ‘been financed using credit, but were triggered by portfolio rebalancing,’ and went on to suggest that the rises represented ‘a return to normal rather than an exaggeration.’
However, the outlook for the German economy as a whole is rockier than its housing market would seem to suggest. Moody’s has put a negative rating outlook on all the core Eurozone countries, even Germany, the bloc’s largest and strongest economy. Only Finland escaped the dour prognosis from the US rating agency.
And there may be a trap, hidden in the German property market, that won’t be sprung for ten or fifteen years, when refinancing time comes around. ‘Many households that are currently buying housing property with large loans at around 3% could have trouble refinancing,’ Mr. Mitropoulos pointed out. The German 10-year average mortgage rate in the decade up to 2000 was 7.7%, more than double current rates.
However, concerns about the near future are unfounded, Mr. Dombret insisted: ‘Excessive credit growth is typical for a bubble and you don’t see that here in Germany,’ he said. ‘Real estate is solidly financed.’ (Source)