Thanks to the low interest rate policies favored by Mario Draghi, the president of the European Central Bank, many Germans are finally realizing the dream of homeownership.
But for many low-income residents in major German cities, the dream is already over. With real estate prices rising faster than income, owning an urban home or apartment is becoming prohibitively expensive.
In relation to annual income, home prices in seven cities – Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart – has risen by a third in the past five years, according to a study by market research institute Empirica for Handelsblatt. The numbers show that home prices in Munich are the furthest removed from the income levels.
In the Bavarian capital, residents must pay on average 7.6 times their average yearly income to buy a well-equipped apartment of 80 square meters (861 square feet). That level has risen by more than half since 2009.
However, since low interest rates have compensated for higher prices, there is no talk of a bubble in German real estate. Not even Andreas Dombret, a member of the executive board of the Bundesbank responsible for financial stability, sees this risk.
“We do not consider the current rise in prices problematic; lending is not growing excessively, and the standards for lending have not loosened,” he said Wednesday. “Measured by this criteria, we do not see a bubble.”
He did, however, agree with the position of those who warn against the massive planned purchase of government bonds by the ECB. He said this has led to “the world being somewhat risky for real estate investors.”
That most likely applies to the seven German cities mentioned above. The households there already have to pay on average 5.5 times their annual income. Not just in Munich, but also in Berlin the prices have risen disproportionately by 44 percent in the past five years.
Berlin attracts a lot of young talent who still don’t make much money. They are contributing to a surge in demand, which has made housing prices in Berlin have above-average increases. In addition there is a base effect: Five years ago the capital was by far the cheapest German major city.
As long as the crisis and low interest rates still support a flight into buying property, the real estate prices will continue to remain uncoupled from the trends in rent
Munich is expensive because well-off Germans and foreigners buy real estate there with their eye on securing assets. They pay especially high prices and accept as a result low rental returns with the confidence that the prices in the Bavarian state capital will also be more stable in a downturn than in other parts of the country.
The prices of real estate are surpassing income in not just the major cities, but also in university cities, such as Freiburg, where housing is occasionally less affordable than in Munich.
Economists expect that the affordability will continue to decrease due to the program of the ECB in purchasing government bonds for more than €1.1 trillion. The fact that the rate of price increase turned out somewhat lower in 2014 than in the three previous years now does not mean anything.
“The upsurge in prices is growing again after the decision of the ECB and the elections in Greece,” said Andreas Schulten, board of management member of the real estate consulting firm Bulwiengesa. The prices have outrun not just the income levels, but also the rents for years. This can be seen in the rent expenditures per household, which have hardly increased in the past five years. A recent study by Deutsche Bank shows that the real estate prices increased by 2 percent more than the rents over the past five years.
By keeping interest rates low, the ECB indirectly boosted the demand for real estate. Low interest rates have the effect of income expansion, said Franz Eilers, head of vdp Research, the analysis group for the Pfandbrief Bank. Building capital is currently cheaper than it has ever been before.
Mortgage loans with ten-year fixed interest rates are available today for 1.4 percent. Therefore the monthly income burden of those buying houses and apartments is lower in many places today than it was in 2009. At that time, banks demanded about three times as much in interest for the same loans.
“The low interest rates are only masking the price increases,” said Empirica management board member Reiner Braun. That will only truly be apparent to the purchasers when their loans expire in 10 or 15 years and they will have to pay off the rest of their debts with considerably higher interest rates. As long as the crisis and low interest rates still support a flight into buying property, the real estate prices will continue to remain uncoupled from the trends in rent.
There is also the fact that the rental controls are expected to come into effect in the first half of 2015, which will curb rents more than before. Tobias Just, a professor of real estate at Regensburg University, summarizes the consequences for investors in one sentence: “The returns will definitely decrease.”
Vdp Research head Mr. Eilers said there is at least the risk for an overheating of the property market, since the frequency of change in ownership is declining. In addition to a lack of other opportunities for investment, he said: “Buyers are gambling with even higher prices.”
Reiner Reichel covers real estate for Handelsblatt. To contact him: [email protected]