BUYING A HOME in Berlin is widely viewed as one of the safest investments a German, or any European, can make.
That is why some property experts are worried the market could get overheated.
Home prices in Germany’s largest cities are booming. Building permits and home ownership rates are climbing fast. And the percentage of foreigners snapping up second homes in Germany is on the rise.
Markets
In Berlin, Frankfurt, Munich and four other red-hot markets, prices surged an average of 10 per cent during the first half of 2012, according to Deutsche Bank. German central Bundesbank data show increases of 9 percent in 2011 in the country’s urban centers and 5 per cent the year before. Home prices had declined or stagnated from 2000 through 2009.
The rate at which home prices are rising in Germany is not sustainable in the long term, says Steffen Sebastian, the chairman of the University of Regensburg’s Institute for Real Estate Finance. However, headds, there won’t be a repeat in Germany of the Spanish and Irish financial crises, where property markets disintegrated and economies were brought close to collapse after overextended homebuyers and banks were hit by recession in 2008.
The recent fervour for German real estate is a consequence of the European debt crisis.
To stimulate economic growth, the European Central Bank has driven its benchmark rate to a record low of 0.75 per cent and that is helping to drive down consumer borrowing costs across Europe. As mortgage rates fall in Germany, many are jumping at the opportunity to finance home purchases, pushing Germany’s home ownership rate to 53 per cent. That’s up 10 percentage points from a decade ago.
Because of the ECB’s interest rate policies, some Germans are fearful that borrowing and spending could rise too quickly, pushing up the prices of everyday goods to unhealthy levels. While inflation remains low in Germany – it’s 2 per cent compared to 2.2 per cent across Europe – Germans have long feared the threat of rising prices ever since the hyper-inflation the country experienced in the 1920s.
As a result, Germans are still looking to protect the value of their savings from inflation. And they are turning to real estate as an investment. If inflation heats up, they can always raise the rent or sell their home at a higher price than they paid for it.
Savings
Even if the market does bubble, Germans are still paying large parts of the sale prices with their savings – rather than high-interest loans – so they stand to lose money they have, rather than money they don’t have, which would cushion the blow of a bubble burst.
People across Europe are also snapping up German real estate. Ziegert Bank and Real Estate Consulting, one of Berlin’s largest real estate agents, says that more than one in six of its clients this year have been from outside Germany. Last year, it was roughly one in 10.
Another reason for the increasing interest in Germany’s real estate is its economy, which has continued to grow – albeit at a slow rate – despite the financial crisis wracking the other 16 European Union countries that use the euro.
German banks normally demand a deposit worth 20 per cent of the property’s value. A typical mortgage has its rate fixed for 10 years. Thirty-year mortgages are not uncommon.
These factors mean that German homebuyers are less at risk of finding themselves unable to repay their mortgages in bad times. Fewer repossessions and foreclosures, in turn, help avoid sharp drops in housing prices.
Berlin
Berlin is among Germany’s most attractive real estate markets — especially for foreigners looking for mid-range investments. Average apartment prices are at about €2,000 per square meter as compared with Munich’s €3,300. By comparison, apartments in Paris fetch between €6,000 and €12,000 a square metre, depending upon the neighbourhood.
The reason for the big price difference, says the University of Regensburg’s Sebastian, is that other European countries’ economies are focused on one or two cities, Germany’s is dispersed over many cities.
Foreigners have come in waves to the German housing market, and they keep telling us the prices in Germany are undervalued, especially in Berlin, but they always misunderstand that Germany is not the same market as any other European country.
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