Bubble fears Germany's Unreal Estate Market

In Germany’s torrid real estate market, prices are doubling in some areas every few years, buyers are gobbling up properties often blind and bankers are force-feeding loans to anxious buyers. Is a reckoning coming?
Growing, growing, growing...

Spotless Jaguars, Maseratis and Mercedes line the cobblestone street, reflecting in the sun. Well-heeled men and women traverse the sidewalk in fine coats and hats, pure-bred dogs in tow.

Behind them, historic villas are to die for -- classic stuccos with grand entries, alcoves and sparkling parquet floors, majestic turrets and landscaped gardens.

Welcome to idyllic Potsdam, the opulent former residence of Prussian kings. On the southwest edge of Berlin, Potsdam is the capital of the eastern state of Brandenburg and a very hot city in Germany’s overheated real-estate boom.

From a stately lakeside manor on picturesque Heiliger See, Anja Farke manages the Potsdam branch of real estate broker Engel & Völkers. Just down the road, Ms. Farke is showing another roomy villa, a lovely shade of rose. It’ll sell for no less than €3 million, or $3.3 million, she assures.

Ms. Farke is used to working effectively with millionaires. She's elegant and attentive, casually fashionable, self-conscious yet reserved. She would never say Potsdam’s real-estate market is blowing its top right off and that she can’t field enough agents to greet all the hungry buyers.

In understated terms, with a slight smile, she said: “What we are experiencing here is a significant rise in prices.” Growing population and proximity to Berlin make Potsdam very attractive, she added, smiling once more.

Young families, well-to-do singles and retirees are moving to Potsdam in droves to escape the bustling metropolis of Berlin and its 4 million residents, for clean, quiet Potsdam, a quiet, dignified very East German city of 165,000.

That's fueling a run on property. Potsdam's purchase price of real estate per square meter jumped by 10 percent last year on average.

In Germany’s amped-up real estate market, prices are doubling every few years, buyers are sometimes gobbling up properties blind without stepping foot inside, and bankers are practically force feeding loans to customers.

Properties move fast and stay on the market for only a few weeks.

To accommodate demand, Ms. Farke just hired five new brokers. Real estate in Potsdam now costs just as much as it does in West Berlin's Grunewald neighborhood, a noble sanctuary of stately mansions in a well-to-do wooded corner of the city's Charlottenburg-Wilmersdorf district.

“Demand is significantly greater than supply. Especially estates on the water can fetch several million euros,” Ms. Farke said.

These are good times for German realtors. The country’s real-estate boom has showered wealth not only across the five largest cities – Berlin, Hamburg, Munich, Frankfurt and Dusseldorf – but beyond to smaller, mid-sized locations such as Freiburg, Oldenburg, Lüneburg, Leipzig and Dresden.

In Germany’s amped-up real estate market, prices are doubling every few years, buyers are sometimes gobbling up properties blind without stepping foot inside, and bankers are practically force feeding loans to customers.

Germans have never shelled out so much money for property as they did last year.

“The 200-billion-euro sound barrier has been broken,” said Jürgen Michael Schick, the president of German real estate industry association, IVD.

Even that may be an understatement, since the trade group’s figures are based on Finance Ministry tax revenue records that do not capture all property transactions. In the commercial market, sales have more than quadrupled over the past six years, while revenue from residential property sales annually is now seven times what it was six years ago.

Still more spectacular is the explosion in prices.

In Munich, prices for single-family homes are up more than 60 percent from 2007, while condominiums are twice as expensive. Rents are 40 percent more today than in 2007.


Expensive Metropolitan Cities property prices and rents real estate 01


The residents of Munich have to make more than eight times Germany’s average household income to afford an 80-square-meter, or 861-square-foot, apartment – more than in any other German city.

Condos, on average, cost about €5,200 per square meter – tack on another one or two grand for properties in decent-to-good locations.

Berlin, once the most affordable capital in the Western world, has had a fairytale development, but with nightmarish results for those who failed to time it right, as well as those who are renting.

Günther Block – who didn't want his real name used – sold his 19th century villa in a nice corner of Berlin’s Charlottenburg neighborhood in 2005 for a clean €3 million. The new owner sold the 3,500 square-meter property six years later for double that.

The house switched hands again shortly thereafter for €8.5 million, before the current owner bought it for €12.5 million.

With property prices rising so fast, real-estate profits are going through the roof.

“The total rate of return for the German real-estate industry in 2015, at 13.3 percent, hasn’t been this high since reunification,” said real estate analyst Bulwien Gesa.

The latest proof of the meteoric rise of Germany’s real estate sector is the wave of consolidation sweeping local brokers into the fold of the country’s largest listed landlord – Vonovia AG, a member of Germany’s DAX index.

And there's no end to the boom in sight.

Long-term interest rates will continue to fall under European Central Bank chief Mario Draghi, who is expected to deepen the negative interest rate for banks by 10 or 20 basis points to minus 0.4 or 0.5 percent next week. Mr. Draghi is trying to goad banks to loan to businesses to jumpstart the economy.

That hasn't happened as planned so far, but it has forced many financially conservative Germans to give up on their traditional interest-bearing savings accounts, overcome their aversion to mortgage debt, and buy property.

Another driving factor is immigration.

Around 1 million refugees flooded into Germany last year and the same number are expected this year. As a result of the influx of asylum seekers alone, the Cologne Institute for Economic Research estimates more than 100,000 new domiciles will be needed each year through 2020.

The real estate boom is redefining long-held investment assumptions in Germany, where in past years it made economic sense to pay low rents than to commit to a mortgage, especially when property was barely appreciating.


Construction in June 2015 on The Friends Project, a commercial-residential site going up in Munich, one of Germany's hottest real estate markets of the moment.


But now that rents, and in many cases, property values, are rising, Germans are increasingly looking to buy property.

The winners so far are first and foremost those in the real estate business: Realtors, banks, notaries, builders, homeowners in boomtowns and the German government, through new property tax and transaction revenues.

The losers are increasingly those who must keep paying rent because they can't afford to buy. But buyers must also beware given the risk, in the current overheated environment, of being duped into bad deals at inflated prices.

But there are rising concerns that Germany may suddenly be diving head first into its own real-estate bubble, and some economists are starting to warn of rising debt levels in a country that otherwise abhors paying interest.

Germany’s central bank, the Bundesbank, has been sounding the alarm.

In 2013, a Bundesbank board member, Andreas Dombret, cited “evidence of exaggeration” in real estate values in Germany. A year later, his boss, Bundesbank President Jens Weidmann, warned of a European “real-estate bubble” that included Germany.

The central bank later estimated a real estate market in Germany was 25 percent overvalued.

What has these economists so alarmed?

Mostly, it has to do with the vast dimensions of the real estate sector – and the fact that most investors finance real estate acquisitions with debt.

According to Bundesbank data, Germany’s outstanding residential property loans total nearly €1.1 trillion – more than a third of gross domestic product. Outstanding home loans in G7 countries – United States, Canada, Germany, Britain, France, Italy and Japan – together total about €14 trillion.

That’s almost as much value as all the goods and services produced by the world’s largest economy, the United States.

If debt is the bane of the global economy, then outstanding real estate loans are a big part of the problem. In the euro-zone alone, these account for €3.9 trillion of a €9.6 trillion debt total.

Such risk threatens to unravel into a full-on crisis if property speculation spirals out of control and buyers plunge headlong deeper and deeper into debt to get a piece of the action. Banks are more than happy to play along.

Chuck Prince, the former chief executive of Citigroup, famously described this process in 2007 during America’s real estate bust, which triggered the global financial crisis.

“When the music stops, in terms of liquidity, things will be complicated,'' Mr. Prince said at the time. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

We all know what happend. U.S. lenders rubber-stamped subprime mortgage loans to more and more unqualified borrowers. Housing prices collapsed; buyers defaulted on loans; millions of properties went into foreclosure.

Those defaults ripped huge holes in the balance sheets of the country's biggest lenders – several of which were deemed too big to fail and were bailed by the U.S. government, costing taxpayers billions of dollars.

The boom-and-bust cycle of real estate markets has caused nearly every recent financial crisis. U.S. real estate prices skyrocketed 90 percent between 2000 and 2007, before crashing by 30 percent in the crisis.

But America is no anomaly. The same happened here in Europe too.

Spain knows this all too well. Its citizens are still haunted by it every time they pass the post-crash ghost towns that dot the countryside along the Costa del Sol and Costa Brava like Don Quixote’s legendary windmills.

Nine year’s after Spain’s real estate bubble burst, the country is still suffering from anemic growth and unemployment above 20 percent, essentially depression-like conditions.

Does Germany’s real estate boom await a similar fate?

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. Charles Prince, CEO of Citigroup in 2007, weeks before the global financial crisis hit

Nico Rottke, a partner at Ernst & Young, sees clear signs Germany’s real-estate landscape is being “very aggressively financed.” In the most extreme cases, lenders are covering up to 75 percent of the price of commercial properties and up to 85 percent of residential real estate.

But economists are not ready to call a German market crash a foregone conclusion.

“Germany is far from removed from the kind of menacing development of real-estate markets of the past, like the United States and Spain,” said Michael Hüther, the head of the Cologne Institute for Economic Research.

Mr. Hüther said that this is, above all, because Germany’s real-estate debt is based on long-term loans with steady interest rates – different than the loans with variable exploding rates that burst the U.S. bubble a decade ago.

Marcel Fratzscher, the president of the German Institute for Economic Research, views the appreciation of recent years as “a process of making up for the weak real estate price development of the past 20 years.”

But even if Germany’s real estate bubble doesn't burst like it did in Spain or the United States, there is a dark side.

Because of the fast appreciation of prices, many middle-class Germans are being priced out of home ownership.

Sonja Bohnenkamp and her husband Bernd are among them. As long-time renters with two children in Neuss-Rosellerheide, a small town 15 kilometers, or 9 miles, south of Düsseldorf, they dream of owning their own home.

For years, Ms. Bohnenkamp, 43, and her husband, 49, have been looking for a property in Dusseldorf.

“It didn’t have to be anything spectacular, just half a duplex with a small garden,” said Mr. Bohnenkamp, a client manager for U.S. consumer products maker Johnson & Johnson.

But after viewing countless homes, they gave up, frustrated.

“First, it was going to cost half a million, then one year later, €600,000. And it was just going to continue” the longer they waited, Ms. Bohnenkamp said.

Almost €1,000,000 for one unit in a duplex? Sonja Bohnenkamp didn’t think the price matched the value. Who guarantees that such a property would not become severely devalued in the future, like in Spain?

After all, the inevitability of rising real-estate prices is not a natural law. Market disasters in the United States and Spain have proved that, and developments in some rural parts of Germany are also worrisome.

Eckhard Spitzbarth experienced that for himself.

The 56-year-old mechanic recently sold a house in Neustadt-Glewe, about an hour southeast of Hamburg. Five rooms, 144 square meters of living space, on a large property. The roof and the heating system are new, and the location is great. Doctors, pharmacies and supermarkets are all nearby.


In some cities like Munich, real estate prices are rising 10 percent or more per year. Some economists are starting to warn of a bubble, but others say German prices are only catching up to the rest of Europe and the world.


And the price?

“I just found a buyer for almost €40,000,” Mr. Spitzbarth said. “I am getting in return about the same as what I paid for it in a foreclosure auction 13 years ago. But only if I include my rental income.”

If he’s being entirely honest with himself, and considers inflation and additional expenses, Mr. Spitzbarth took a bath on the investment.

The problem, he explained, is that prices never recovered after “falling through the floor” in the wake of the financial crisis.

For decades, Germany’s real-estate market was an outlier.

Even amid the current real estate boom, only 53 percent of Germans live in their own four walls. That’s the lowest rate worldwide. In the United States, 65 percent of the population owns their own homes.

In Italy, 73 percent do, while 83 percent of Spaniards do as well.

Germany’s situation is unique, dating back to the near total destruction of the country in World War II. Because people had no money to build homes themselves, the state erected millions on their behalf.

It remains unclear whether the current boom will lure the majority of Germans into acting more like Americans and Spaniards and buying their own homes.

If that happens, they could become susceptible to the illusion that a home or apartment can be something secure, tangible – in contrast to a share of stock or a corporate bond traded on the world's financial markets.

“The recent appreciation could again disappear when the baby boomer generation in Germany retires in ten years and everyone simultaneously tries to sell real estate,” said Clemens Fuest, the head of German economic research institute Ifo.

In a world lacking in secure investment opportunities, the appeal of property investments is never as great as it is today.

But in this day and age, nothing is guaranteed.


Simon Book, Jens Münchrath and Reiner Reichel are Handelsblatt editors who write about the real estate sector, among other topics. To reach them: [email protected], [email protected] and [email protected]