Real estate experts forecast increased activity in the German market, as buying property here is one of the safest investments one can make. Berlin is on top of the list of secure real estate investments, while home prices in Germany’s largest cities are on the rise, along with the number of building permits issued and home ownership rates. As the local real estate market becomes more attractive, more foreign investors are trying to get a piece of the action.
In Berlin, Frankfurt and Munich, prices have gone up 10% on average in the first half of 2012, as shown by data from the Deutsche Bank. German central Bundesbank data also showed 9% increases in 2012 for German urban centers, after another 5% spike in 2010. This is quite an interesting trend, given the fact that home prices either declined or stagnated from 2000 through 2009 in the German real estate market.
Yet this growth rate in home prices is not sustainable on the long run, as explained by Steffen Sebastian, the chairman of the University of Regensburg’s Institute for Real Estate Finance. He however believes that Germany will not see the same financial crises that Spanish and Irish markets faced as real estate markets fell to pieces, putting a great strain on the overall economy when homebuyers and banks were devastated by the 2008 economic downturn.
“When we talk about bubbles of course the market in Germany cannot be compared with the U.S. market,” he said. “Usually the other bubbles are driven by excessive use of leverage by borrowing money but in Germany borrowing was always quite heavily regulated and this is not going to change.”
The current trends of the German real estate market are actually a consequence of the European debt crisis. The European Central Bank had to lower its benchmark rate to the record of 0.75% as a way to stimulate economic growth. This measure meant lower consumer borrowing costs across Europe. Germany reported dropping mortgage rates as a result, thus the large number of people taking advantage of the opportunity to finance home purchases. This phenomenon caused the home ownership rate of the country to jump to 53%, 10 points up from 10 years ago. This current trend creates of risk of having borrowing and spending rise too quickly, which would also drive everyday goods prices up.
While at this point Germany’s inflation is still lower than the European average (2% compared to 2.2 %), there is a justifiable fear of hyper-inflation. To counter that possibility, Germans try to protect the value of their savings through real estate acquisitions. In the eventuality of a bubble burst for real estate, the fact that most local buyers are using their savings, as opposed to high-interest loans, they would not stand to lose money they don’t really have.
Other European buyers are also investing in this thriving market. As interest on savings is very low, Italians, Spaniards, French and other Europeans invest in the German housing market. Germany’s rising rents and home prices are some of the traits that make this market a safer place to get a return on real estate investments. According to statistics from one of the largest real estate agents in Berlin, Ziegert Bank and Real Estate Consulting, more than one in six of its clients this year have been from outside Germany. A significant increase from the 2011 ratio of 1 in 10 clients.