At first glance it seems like good news: Politicians and real estate experts in Germany insist there is no bubble in the country’s housing market.
And it’s even what members of the Bundesbank, the guardians of Germany’s financial stability, are saying. In fact it’s such good news that the central bank repeated it recently in its annual report.
But if there is one lesson to be learned from the many decades of recurring financial crashes, it is that one should never trust the reassurances expressed as part of a herd instinct.
First of all, a bubble is only recognized when it bursts. Second, the lack of action by our financial market watchdogs means one thing above all: Prices could continue to rise uncontrollably. And they will.
Especially in big cities, prices will not only rise unchecked, but will in fact continue to rise at an accelerated pace. After real estate prices were driven up by low interest rates, a housing shortage and international demand, the refugee wave has been added to the mix this year.
One should never trust the reassurances expressed as part of a herd instinct. A bubble is only recognized when it bursts.
One problem at a time: Real estate is clearly booming, but are there also signs of a bubble?
The overall German credit market, at any rate, is not showing any cause for alarm. According to real estate website Europace, the average German is paying off more debt than five years ago, has access to more ample capital resources and has secured record-low interest rates for longer periods of time.
If the financing is so solid, everything else must be in good shape. At least that’s what one would expect, if it weren’t for the fact that real estate prices have increased by a fifth within five years. And that is only the average value, which blurs the situation in German urban areas, where prices are shooting up uncontrollably.
Apartment prices in Munich have almost doubled since 2007, increasing by another 18 percent in the last 12 months alone.
Unfortunately, the credit situation is also not as solid as the averages suggest. In major cities like Munich, Frankfurt and Hamburg, some mortgage loans seem almost reckless, in light of the exorbitant price increases.
According to the Bundesbank, some borrowers are not even using their own funds to pay purchasing costs, like taxes, notary and real estate broker fees. In the most expensive big cities, the ratios of prices to income have increased to alarming levels.
But don’t rising prices make us more affluent? And shouldn’t we welcome the fact that – after decades of renting while citizens of many other developed countries were buying property – we are finally mutating from a nation of renters to one of homeowners?
Of course, it is neither socially nor economically alarming that more and more Germans want to be homeowners. But the enormous price increases do give cause for concern.
As the bitter fates of Spain and Ireland in the financial crisis have shown, prosperity based on real estate is not built on bricks but on sand. In the long term, such excesses cause substantial economic damage.
The social consequences are also enormous. If prices continue to rise unchecked, large German cities will soon encounter similar generational problems as in London, Europe’s most extreme real-estate market. A debate has been raging for years there over “generation rent,” which is not making the jump onto the real estate ladder and can no longer afford to live in the city.
In contrast to Great Britain, not owning a house or a condo is far from tragic in Germany, which probably has Europe’s best tenant protection laws. Still, why should the younger generation be deprived of what older people could afford, in light of the overvaluation of real estate?
This is why the drastically rising prices in big cities are a slow-acting poison – for society, the economy and the banking system, in which visible concentrations of risk have not formed yet.
Lawmakers should take countermeasures as quickly as possible, applying a two-pronged approach: First, the housing shortage in metropolitan areas must be ameliorated – by making it easier to zone properties for construction, relaxing building requirements and eliminating counterproductive rent controls.
To prevent the market from overheating even more, it should be made more difficult to obtain credit. A minimum contribution of equity capital is just as important as a cap on a borrower’s debt burden relative to his or her income.
Only if demand is curbed today and the supply is expanded will the Bundesbank be able to issue the all-clear signal for the German housing market in five years.
To contact the author: email@example.com