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vdp so far sees no sign of the German housing market overheating

15.01.2013
Report on the current situation on the German housing market published

In the assessment of the Association of German Pfandbrief Banks (vdp), the German housing market so far shows no sign of overheating. Instead the, in some cases, sharp increase in prices can be explained by fundamentals and stems, above all, from demographic changes and location-specific circumstances combined with the continuation of extremely low interest rates. This is the conclusion drawn in the short market report published today (“vdp Real Estate Special – German housing market at the start of 2013”). Summing up the results of the report, Jens Tolckmitt, Chief Executive of the vdp, said, “The latest rise in rents and prices for residential properties reflects the currently strong demand on the housing market, particularly in immigration regions. Given the positive situation on the labor market, the general growth in incomes and the extremely favorable funding conditions, this price increase is attributable to fundamentals. It cannot be ruled out that this trend in prices may build up its own momentum, with possible negative consequences for the housing and the financing markets. But as things stand today, this danger is fairly small.”

The upward movement that has persisted for five years now in prices for owner occupied dwellings gathered pace yet again last year. In the first three quarters of 2012, prices rose in Germany as a whole by 2.8 percent, driven largely by rising prices for owner occupied apartments (condominiums) (+3.3 percent). According to the vdp’s report, price increases are concentrated in economically attractive regional markets such as the large cities Munich, Berlin, Cologne and Hamburg as well as university towns like Münster, Regensburg and Trier. In markets such as these, developments in population have become more and more uncoupled from developments in housing stocks. Most recently, rising numbers of inhabitants and households stood in contrast with new construction activity in apartment buildings which – though rising of late – is in some cases still very low. This has led to a growing imbalance between supply and demand in housing. Furthermore, this development is reinforced by the unbroken desire for safe investments, with buyer interest focused primarily on residential properties. The markets for rental apartments and condominiums, particularly in the prospering towns and cities, are strained.

For a number of years now, moreover, low interest rates on loans have provided favorable conditions for the formation of home ownership. As a result, the average debt service burden has fallen almost everywhere in Germany, despite the increase in prices for condominiums. “This is also true of cities such as Munich, Berlin and Hamburg, where considerably brisk demand has caused prices for condominiums to go up at an above-average rate in recent years,” said Dr. Franz Eilers, Head of Property Market Research at vdpResearch and author of the market report.

At the moment, vdp considers the dangers for the financial market emanating from the housing market upturn to be slight, given that growth in residential property mortgage loans in Germany is moderate despite the pronounced rise in the number of transactions. This indicates a rising share of own funds when it comes to financing owner occupied homes. In addition, the combination of long interest rate fixation periods, which are usual in residential property finance in Germany, and comparatively high amortization rates have a stabilizing effect, as a substantial part of the loan is already repaid during the first interest rate fixation period.

vdp Spotlight Real Estate - German housing market at the start of 2013

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