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Source: TD International

The majority, at 59%, see a range between 210,000 (Prognos Institute) and 300,000 units (Pestel Institute) per year for the period up to 2020; for 29%, it will stay at up to 225,000 units, while 12% even see more than 300,000 as necessary, according to a current poll conducted by the LBS banks. This means that completions, which were estimated last year at 200,000 units, could lag by as much as 50% behind demand.

Source: TD International

Freiburg moved ahead of Hamburg for the first time, climbing into second place. Flensburg is no longer among the ten most expensive cities in Germany, but Ingolstadt moved up into seventh place again. Although rents rose by only 0.6% over the previous quarter, they were still 5% higher than for the same period in 2010. Neither the composition nor ranking of the ten most expensive cities for rentals changed since the last quarter. Munich still leads by a wide margin, followed by Frankfurt, Hamburg and Heidelberg. Internal migration is also leading to a broader range of rental rates in the rural districts. While those with high immigration have seen rent levels rise by 6.4% in the past two years ‒ almost as much as in urban districts (+7.1%) ‒, rural counties with high emigration have shown stagnating rents.

Source: TD International

Berlin: Affordable apartments remain available

Total return in 2011 consisted of a 5.3% net cashflow yield and 0.2% capital growth. The capital growth was again positive for the first time since 2001, but this is largely thanks to residential real estate. In this segment, capital growth rose by over 3% – the highest level ever recorded by IPD. For office and industrial properties, however, value development was negative in 2011. The highest total yield among the individual property types was for residential real estate (7.8%), followed by industrial and commercial real estate at 7.0% and 6.1%, respectively. Office properties attained 4.3%.

So what’s going on? One factor is a fear of inflation. Since the years of hyperinflation in the 1920s, “Germans have had a visceral fear of money becoming worthless”. Many worry that the European Central Bank’s (ECB) liquidity measures could eventually stoke a strong surge in inflation.

With cash offering historically low interest rates, demand for hard assets, such as property, has risen. Unemployment at a 20-year low and robust real-income growth, along with low interest rates on loans, is also stoking an appetite for property. Moreover, many Europeans from outside Germany, fearing the consequences of a euro collapse, are keen to invest in hard assets. German banks have received plenty of cash from the troubled periphery and the ECB’s cheap loans have made more cash available to lend.

An increase in the number of single households, a trend expected to last until 2025, and the sluggish recent pace of new construction are also factors, notes Wirtschaftswoche. A study by the Pestel Institute estimates that Germany’s ten biggest cities are missing more than 100,000 flats with affordable rents.

The boom has yet to turn into a bubble, however. Tobias Just of the University of Regensburg points out that while there are localised bubbles, even in the highly sought after cities price rises have only slightly outpaced rental increases. That points to a sustainable market upswing. An Anglo-Saxon-style credit binge to go with the housing boom seems unlikely. As James Wilson points out in the FT, lenders “hold to conservative valuation standards and… a hefty down-payment”.

However, the German property boom is another example of the diverging fortunes of southern and northern Europe. The prospect of a property bubble in Germany could prompt the ECB to refrain from further liquidity injections and may even prompt a rise in interest rates, thus making the periphery’s life even harder. The ECB and the Bundesbank, according to Fxpro.com, “are on heightened alert”.

Source: http://www.moneyweek.com

The exporting powerhouse that has developed in Germany on the back of euro weakness is still doing well of course. But as the FT points out this morning, what has really grabbed the attention of the economists is the fact that private consumer spending rose 1.5% last year, and looks set to do something similar this year. However what really catches our eye is not the spending on wine and the like (for example imports from Spain rose 20% last year). No, it’s the spending on houses…

German fear of inflation is driving house prices higher

We started looking at German property back in 2007. We noted that you could buy an apartment in Berlin for a tenth of the price of one in London.

We saw that only 40% of Germans owned their own homes, but that the mortgage market was about to be liberalised – making it easier for them to shift from renting to buying.

We saw the high yields on offer. And we confidently predicted that, after two decades of entirely stagnant prices, anyone buying in was bound to do well.

We have a tendency of being four to five years early with predictions. This call turned out to be not much of an exception. Nothing much happened for a few years. But it’s happening now.

Prices across Germany rose 2.5% in 2010 and 5.5% last year (that’s twice the rate of inflation). In some cities, such as Berlin and Munich, apartment prices were up 10%. A few weeks ago, the FT even reported a very un-German and bubble-like trade in Munich: a house which sold for €3m six years ago has just changed hands for over €6m.

So what’s going on? Clearly this sudden change isn’t just about rising confidence among the general population. It is also about some kind of lack of confidence. For example the British still want to pile into the buy-to-let business because it feels solid in a time of economic flux and because they think it offers an income. The Germans too are searching for a financial safe haven.

And property doesn’t just offer a good yield (in much of Germany at least). It offers a degree of protection against the fallout from the problems in the rest of the eurozone and against inflation.

“People have started to look for alternative investments, and one of the obvious ones is bricks and mortar. Couple that with angst about inflation, which is driving people into real assets, and what you see is high demand for property”, Andrew Groom, head of valuation and transaction advisory for Germany at Jones Lang LaSalle, the property consultancy, told the WSJ.

But it’s also about the fact that construction has been lagging behind demand. In Berlin, the supply of new housing rose 0.9% from 2005 to the end of 2011, but nearly 5% more households were looking for a home.

And most crucially of all – given that demand for property is mainly about the supply of credit – it is about rising lending. Earlier this month, the association of German savings banks (whose members provide around a third of residential lending), said that property loans were the “biggest factor in increased lending” and that their customers were showing a “strong preference for material assets”.

There is, says Kai Carstensen, an economist at Munich-based think tank the Ifo Institute, a good chance that a large part of the liquidity on offer from European Central Bank loan programmes is going straight into the German residential market via the German financial system.

How can you profit from German property

There’s probably a way to go with all this. Jens Wiedman, the president of the Bundesbank, has warned of rising inflation pressures. He has started using the word bubble; and noted that he will be keeping a close eye on rising asset prices. But it is hard to see exactly what he might do about them beyond watching them.

Part of Europe’s problem over the last decade has been the fact that interest rates have been set at a rate that has suited Germany rather than the rest of the union. In short, they have been much too low.

It is hard to see anyone thinking it might be a good idea to double up on that error by raising them now to stop a property bubble in Germany, even as Spain, Ireland and Portugal implode.

The International Monetary Fund might think that pre-emptive action to prevent asset bubbles is a good idea. But if any action to stop price rises in Germany might mean that price falls in say Ireland (where prices were down 18% year on year in February) accelerate, I can’t see that anyone else would be on board with the plan.

Source: http://www.moneyweek.com