There are few chances in life to make easy money, but at the moment affluent Germans are coming very close to doing it. In the first quarter of 2017, the nominal net worth of German households grew by 6.5 percent over the previous year. This was significantly more than the 2-percent increase in consumer prices, and results in a real capital gain of about 4.5 percent – almost solely through appreciation.
This is partly attributable to the rally in the real estate market, which continued with a 6-percent jump in value. Prices of business assets and equities rose even more sharply, at rates of 14 and 18 percent, respectively, according to the latest Asset Price Index prepared by asset manager Flossbach von Storch. But this isn’t good news for everyone.
The homeownership rate in Germany is low, at about 45 percent of properties compared to more than 80 percent in Spain, but it is growing fast, with some analysts fearing that rocketing prices are causing a bubble. Real estate prices have increased by 35 percent since the first quarter of 2010.
But while this is good news for property owners, it is a huge problem for young people and families seeking a permanent place to live. The record-low interest rates for mortgage loans are of little use to them because they usually lack a key requirement: security in the form of assets.
“If interest rates go up again, prices will fall and some property owners will suffer large losses on their invested capital.”
This makes it increasingly difficult to stump up the necessary deposit for a loan and pay the purchase costs. Banks usually require at least a 20-percent down payment, while property transfer tax, legal costs and other fees make up 10 percent of the purchase price. In other words, a potential buyer needs €150,000 ($178,000) in disposable assets to buy a €500,000 property. In Frankfurt, for example, buyers would be hard-pressed to find a 100-square-meter (1,076-square-foot) apartment in an average location and of average quality for that price.
The Flossbach von Storch figures make depressing reading for youngsters keen to get on the housing ladder. They show that the average household with a primary breadwinner between the ages of 25 and 34 has assets of €68,000, which falls to €52,000 after deducting debt. But this is hugely inflated by the 12 percent of such households that already own a house or apartment – their real estate assets actually account for half of the entire wealth in this age group. Take these out and the average financial assets of young householders amount to a little over €20,000. For them, the chances of securing financing for a purchase are slim.
“Young households and the lower middle class suffer from asset price inflation, because few own property or business assets,” said Philipp Immenkötter of the Flossbach von Storch Research Institute.
The institute’s director, Thomas Mayer, lays the blame for the sharp increase in real estate prices squarely at the feet of the European Central Bank. “The ECB’s low interest-rate policy has made mortgage costs so cheap that many people are now buying real estate,” thereby bumping up costs for youngsters, he said.
He’s not alone in pointing the finger at the ECB. Germany’s central bank, the Bundesbank, establishes a direct relationship between the ECB policy and asset and real estate prices. “The prices of assets have risen in parallel with declining interest rates and yields,” it said in a recent article. It adds that this is reinforced by feedback effects: The net assets of borrowers are increasing, as is their loan collateral, making it easier for banks to issue additional real estate loans, thus driving up demand and prices even further.
But what acts like a mammoth wealth-creating machine primarily benefiting older and more affluent householders, is even dangerous for them, said Mr. Mayer. “If interest rates go up again, prices will fall and some property owners will suffer large losses on their invested capital.” This is especially the case, he added, for those who purchased rental apartments at very high prices and with low yields.
But in the meantime, it is youngsters with few assets that suffer the most. Households that do not own property and have no significant other assets are completely left out of this positive feedback system. Instead, they are forced to look on as real estate prices become more and more out of reach, and forcing them to keep renting or move to cheaper areas.
So much for easy money.
Norbert Häring writes about monetary policy, exchange rates, credit markets and the latest scientific developments in economics. To contact the author: firstname.lastname@example.org