Germany’s house price bubble is only just getting started

By Merryn Somerset Webb

published 30 March 2012

in Features

Unemployment in Germany is now at its lowest since 1990.

Today a mere 6.7% of the population are jobless a record low for the unified country (ie since 1990).

Those in work are pretty confident in their futures too. How do we know? They're spending money.

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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.

So how can you benefit? You could nip over to Berlin and pick up your own flat. Otherwise there aren't that many options. Our old favourite Speymill overleveraged itself into the crisis, and is no longer with us. So much for that.

We'll look at other possibilities in more detail in an issue of the magazine soon but those who want something to be going on with might look at GSW (FRA:GIB). It is listed on the Frankfurt Stock Exchange and owns leases and manages residential apartments in Berlin.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.