German Housing Prices Soar!

Article Summary:

• Housing prices in Germany soar higher,
• Home prices in Berlin, while still cheap, are up 40 percent since 2007.
• Real estate yields are more attractive to investors than the one percent yield you get with the 10 year Bund.

Recently, economic data, showed that home prices shot up a staggering 20 percent year on year growth. Can one say “bubble?” The Bank of England Governor, Mark Carney, has already stated warnings to raise mortgage rates to cool this expanding real estate bubble.

London, England, is not the only region in Europe seeing a rapid expansion of property prices. Just across the channel, in the economic powerhouse of the European Union, Germany’s real estate prices are also shooting higher. Cities like Munich and Frankfurt are becoming more and more attractive to live and work in as rural Germany is running to urban areas for work. This is pushing home prices higher. The search for a good yield is always a key driver for property prices.

The near zero interest rates in the EU make perfect sense for the combined bloc but, for sure, not Germany. Their economy is relatively strong and the current EU economic policy does not match German reality. With the 10 year Bund at one percent, money is now flowing towards property. Rental yields are attractive at 4 to 5 percent and German property values are still very cheap compared to the region. Germany has stable incomes, low interest rates which makes real estate a sweet investment. Oddly, unlike London, the capitol of Germany, Berlin, is not seeing high prices.

According to data, just released by Dunn and Bradstreet, properties in Munich are the highest per square meter at €4,800/meter. Berlin is cheap at €2,930/meter. Frankfurt came in at €3,400. Compare that to London at €11,120 and Germany is like a yard sale. However, prices in Berlin are up 40 percent since 2007. They have only grown 25 to 30 percent in Hamburg, Frankfurt and Munich in the same time period.

The German central bank, Bendesbank, has been voicing serious concerns over this growing bubble. They recently stated that, “there is an increasing risk of a housing bubble in Germany.” They also feel property values are overvalued. While property values have shown some moderation, there is still much room and fuel for prices and rent to go higher. There is no signs that rental prices are hitting a peak or cooling off, even though yields and prices are inversely related. As yields continue to move higher, then we should see prices come down. So maybe this is over the horizon and the German central bank will not need to intervene.