German reliability. Is it profitable to buy housing in Germany

The global crisis did not provoke a reduction in prices

Even if the global economic crisis happens, there is reason to believe that it will not cause a collapse in prices. Over the last 50 years in the real estate market of Germany there were three periods of decline: in the years 1972-1976 (when the housing fell by 6% adjusted for inflation), in 1981-1989 years (-15%) in the 1995-2008 years (-20%).

If the first two were triggered by world crises in 1973 and 1979, with a lag of 1-2 years, the third was associated with the overproduction of housing in the domestic market, that is, after the 1990s there has been a violation of the balance between the German and other European markets.

When Europe and the United States in 2007 burst the bubble, in Germany it was not. Thus, the world economic situation has limited impact on the German real estate market.

Real estate in Germany is more expensive with 2009 at roughly the same pace as in the first half of the 1990s, but the current growth period is different from the previous one.

First, the current increase in prices is underpinned by a stable economy. In the early 1990-ies of the German GDP has changed unevenly: from 5.3% in 1990 to minus 1% in 1993 and again plus 2.5% in 1994.

In the last five years the economy grew steadily and accelerated from 0.6% in 2013 to 2.5% in 2017. The labour market behaved accordingly: in the first half of the 1990s, unemployment increased (from 5.5% to 8.2%) and 2013 to 2017 was reduced (from 5.2% to 3.6%).

Second, housing is not enough. In the early 1990s and the last five years the population of Germany is growing at about the same speed (about 450 000 people per year), while the number of annually issued permits for construction fell, according to various estimates, half to two times.

According to Thomas Bauer, head of the Federation of construction industry of Germany (Hauptverband der Deutschen Bauindustrie), to meet the demand in Germany is required annually to build the 400,000 housing units in 2017 in Germany has been issued 350,000 building permits.

Thirdly, changed the structure of immigration. If in 1990-e years in Germany moved mainly refugees, labor immigrants and repatriates, from 2010 among immigrants has become more professionals and researchers. Many of them are moving in the framework of the “blue card,” which the EU gives to professionals with a good education: according to Eurostat, Germany accounts for 85% of these permits.

Radically changed the demographic situation in Berlin. In this town the population is growing by 50,000 people per year with a total population of 3.5 million, the Main inflow — the young and middle age with education, skilled workers. People come with money to hire good home and buy it. Thus, they contribute to increase the cost of housing and have 2-3 times more pressure on prices than the average Berliner.

The difference between the growth rate of the cost of buying and renting exaggerated

The decline of profitability of the rental business — a trend common to most developed market, according to Deloitte, the yields in London, Paris, Vienna and Graz, is much lower than in the cities of the “big seven”.

An important caveat to consider when comparing the dynamics of prices and rental rates, the regulation of the German market. According to the rules in Germany for three years, the owner may increase the rent by no more than 20% (in Berlin — 15%), and in most regions at the conclusion of a new contract, the landlord can increase the rent to a value not exceeding the official index of rent by more than 10%.

Because of these restrictions in major cities, rent can not grow as fast as the purchase price, which is formed by the mechanisms of supply and demand. Therefore, data calculated on the basis of the old leases did not reflect the real demand and willingness to pay more.

According to mortgage broker LBS, in the Hamburg apartment rented 70% of the population in Berlin is 80%. According to statistics, in Munich one apartment has an average of 77 potential tenants in Stuttgart — 75, Cologne and Freiburg — more than 50, in Berlin 33.

German Institute for economic research (Deutsches Institut für Wirtschaftsforschung, DIW) in July 2018 published a study Signs of new housing bubble in many OECD countries — lower risk in Germany.

The DIW experts analyzed data from the OECD on the dynamics of property prices in 20 European countries and came to two conclusions. First, Germany is exposed to the risk of the bubble to a lesser extent than, for example, Sweden and the UK, due to the low level of indebtedness of private households. Secondly, analysts say DIW, the German real estate market is overheated only in large cities and primarily in the segment of apartments in new buildings.

Mortgage rates will not rise dramatically or significantly

Among experts there is no consensus on whether to increase the Bank rate, and if Yes, when, how much and how fast. In my opinion, today there are no preconditions for a significant cost of money: the global economic slowdown has led to the fact that in the modern world has no tools to invest money with high returns.

Moreover, a low probability of falling prices in Germany due to the increased cost of credit associated with the features of the German mortgage market: it is very conservative. Local banks carefully check the solvency of borrowers, size of loans is rarely more than 70% of the cost objects. Therefore, the comparison of the current state of Affairs with the collapse of the mortgage market in the United States in 2008 has no reason: American banks gave loans to everyone under 100% of the total value of homes when borrowers are unable to repay the money, they began to sell akreditovannye objects. In result real estate prices collapsed — it was just there to buy.

In my opinion, property prices in Germany, though lower rate, but will continue to grow. I see no assumptions to drop and the German economy is moving in a favorable direction for the market: according to the forecasts of the European Commission, Germany’s GDP will continue to grow by about 2% per year.

According to German consulting company Haufe, JLL already captures the first signs of a slowdown in the first half of 2018 at the eight biggest cities of Germany, the growth in apartment prices was 8.4% with an average of 9.7% over the past five years, in Munich to 6.8% versus 9.9%, in Hamburg — 4.3% versus 6,7%, in Dusseldorf the growth practically stopped.

But prices began to fall, we need good reasons: the sharp rise in interest rates or serious problems with the German economy, which today is one of the most stable and reliable in the world. Even after the ECB lowered its interest rate from 4.25% in October 2008 to 1.75% in may 2009, the effective mortgage rate in Germany fell only from 5.4% to 4.3% over the same period — this confirms the stability of the German mortgage market.