Wolf Richter: Now a Housing Bubble in Germany

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Germans are practically euphoric these days—compared to the dour mood that prevailed for nearly two decades following reunification, when real wages declined in a stagnating economy beset with what appeared to be permanently high unemployment. While discontent smolders in other Eurozone countries, 88% of Germans are satisfied with their standard of living (Gallup). And 85%—a record since the beginning of the surveys—believe that they can get ahead if they work hard, up from 71% in 2007. This optimism is joyriding the powerful German export machine, an optimism that appears to be impervious to the nightmarish scenarios playing out at the periphery of the Eurozone. And it still hasn’t reacted to what may be the onset of a recession in Germany as the economic superstar has smacked into a wall. Read…. Germany’s Export Debacle.

And now, Germans have something else to be euphoric about (for a while, at least): a housing bubble.

The German housing market stagnated after reunification. And if adjusted for inflation, it declined significantly, while other countries, such as Ireland, the UK, and Spain, experienced huge bubbles. Only Japan’s housing market was more morose over the same period (graph, real housing prices 1997-2008). But by mid-2009, prices began to rise. In 2010, they were up 2.5% nationwide. And in 2011, they climbed 5.5% (Bundesbank, Monatsbericht)—with the hottest locations exhibiting bubble characteristics:

In Hamburg, prices of existing apartments skyrocketed 14% year over year in January. In Munich, prices of new apartments jumped 12%. In Berlin, prices of existing apartments rose 10%. In Cologne, prices of existing apartments rose 9%. These numbers confirm what I’ve been hearing anecdotally for two years: that Germans were plowing their money into brick and mortar.

It was the first time since reunification that an economic upturn produced significant price increases in housing, the Bundesbank said in its report. Among the top reasons:

– Household optimism—and the fact that the debt crisis hasn’t impacted that optimism.

– Record low financing costs. Average interest for a loan for 60% of the purchase price (Germans are a bit conservative) hovered around 3%, half of what it was ten years ago.

– Inflation fears and a seething frustration with the ECB’s loose monetary policy.

– Low yields for savers and holders of German government bonds. With these yields remaining below the rate of inflation, the average 5% yield on rental property suddenly is appealing.

– Capital preservation in times of increased risks and volatility in the financial markets.

– Capital flight from Eurozone periphery states where Germany is considered a safe heaven, particularly since it didn’t have a housing bubble.

– And now that prices have been rising, optimism is propelling prices even further.

Unlike in the US, most of the homes in Germany are rental properties. Only 43% of German households own their home, according to the Association of German Pfandbrief Banks. Homeownership is not subsidized by the taxpayer, as interest on a home mortgage is not deductible. And the government has stayed out of the mortgage securitization business. Instead, banks issue covered bonds against 60% of mortgage lending value. These bonds fund about 25% of all mortgages. Loans from savings banks and credit cooperatives fund most of the remainder.

As always during a bubble, individual investors are piling in. “And among them are more and more who are trying for the first time to invest directly in rental properties,” said Felix von Saucken, from the brokerage firm Engel & Völkers Commercial.

And so are institutional investors. Last week, in the largest real-estate transaction since the financial crisis, a consortium of German and foreign institutions bought 21,500 apartments from the Landesbank Baden-Württemberg for €1.4 billion.

The irony inherent in a monetary union: even if bubbles become clearly visible in certain countries, such as Germany or Denmark, their central banks are condemned to sit on the sidelines because they cannot set interest rates. Meanwhile, the ECB is flooding the market with cheap money to keep parts of the Eurozone and some large banks from imploding. In doing so, it is inflating bubbles in other parts of the Eurozone. Which comes with a steep cost: when housing bubbles blow up, the damage they leave behind is immense.

It may hit just when Germany can least afford it. Chancellor Angela Merkel warned that the country might be overwhelmed by its efforts to bail out the Eurozone and must not make promises it can’t keep. That reluctance has made Germany a punching bag. But the numbers are already staggering. Read…. Germany’s Ballooning Bailout Risks.

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  1. Nathan Tankus

    This changes the game. perhaps this will increase cost of living and even out the unit labor cost differentials in the eurozone? time to wait and see.

  2. richard wilson

    I saw a program about this. The housing bubble is real. Prices in Germany are sky high. Many Germans live on city lakes in tiny (and I do mean tiny) little houseboats that go for a million or more euros each. A big fad is to strap steel barrels together, put a wooden platform on the barrels, and then place a one-room wooden shack on the platform. The floating shacks cost 3,000 euros to fabricate, and they rent for 3,000 euros per month. Der Spiegel had an article about this. Any dock or jetty on a lake in a populated area is now multi-million-euro real estate. It’s madness. Big pushers in this are Germany’s two giant privately owned Wall Street-type scammer banks, Deutschebank and Commerzbank. Their mission is to spread Wall Street criminality, and to suck in the more conservative Landesbanks, which are public banks. In this way the big public banks will buy out all the Landesbanks, creating a private two-bank monopoly. Doubtless the German housing bubble entails all kinds of ARMs, subprime loans, and whatnot – the same things that put the USA into its current Depression. Such loans are taken out to build apartment complexes.

    When the housing bubble bursts, average Germans will know what Greeks are going through. CHINA has an even larger housing bubble.

    France and Germany have prospered by scamming other European nations into buying French and German products. Greece, for example, is the world’s second largest arms importer, and its arms come from Germany. If Greek politicians want to stay on the bankers’ payroll, they must buy mountains of arms from Germany that Greece does not want or need. The German arms are purchased on credit, which the ECB and IMF conjure up out of nothing. This is the secret of Germay’s export success. European nations don’t have money to buy all those German products. Hence they take out German loans.

    Thus, Germany’s “economic miracle” runs on a giant bubble of debt. When it all bursts, it will take everyone with it, including France and Germany, two nations that could well end up with the worst Depression of all. It’s insane, and it can’t go on much longer.

    1. Very Serious Sam

      “I saw a program about this”

      Certainly a respectable, serious and well researched program by a source with undisputable reputation.

      As for the rest of your funny fiction about Germany, your tinfoil hat might need some fortification.

    2. GermanQR

      I’m sure this you watched this on The Onion. Residential real estate prices are (still) low in Germany.

      1. bmeisen

        Here in Frankfurt they’re sky high, as in Munich, Hamburg, Düsseldorf, Köln to a lesser extent. I think there’s something to Richter’s argument, and nothing to the story about houseboats.

          1. Kiste

            Good grief. It’s an oddity. A bunch of people living in boats. We’re talking a few dozen people here. How do you go from this to your ridiculous assertion that:

            “The housing bubble is real. Prices in Germany are sky high. Many Germans live on city lakes in tiny (and I do mean tiny) little houseboats that go for a million or more euros each”.

            There is no housing bubble in Germany, there is literally NOTHING to support this assertion once you look outside the few places like Munich and Frankfurt that are starved for residential space and priced accordingly.

            The article is simply shoddy and your comment went even beyond that. I’d call it comical.

          2. bmeisen

            Thanks for the link. It’s a report about Berlin, which is atypical for Germany’s housing market. It has long been a haven for alternative lifestyles. Recently their enemies, real estate interests among others, have been able to effect the eviction of squatters and weaken the city’s reputation as a goldmine for cheap living space. Consequently a few people are re-discovering the joys of houseboating. Not a country-wide trend.

    3. Tyzão

      I thought most of those “houseboat” homes were zoned into moratorium — so for example, if you found a trawler floating on the Spree (usually a restaurant, but could have a residence as well) you could buy it and move in, otherwise, I think there are pretty strict zoning laws on this kind of stuff. Somewhat similar to living on a sailboat in Florida for example, you couldn’t just drop anchor at a mooring post and decide to live there for say, 20 years or something — pretty sure there are also strict local regulations for that kind of stuff, regardless of how loose and wreckless the rest of the real estate market was on land in the environs.

    4. Up the Ante

      ” 3,000 euros to fabricate, and they rent for 3,000 euros per month. ” Improved structures ?

      ” Deutschebank and Commerzbank. ”

      ” The German arms are purchased on credit, which the ECB and IMF conjure up out of nothing. ”

      Perhaps the German banks have not been taught manners this time around.

    5. AccruedDisinterest

      “France and Germany have prospered by scamming other European nations into buying French and German products.”

      Huh? How do you scam someone into buying an eighty thousand dollar car, or a two hundred dollar bottle of champagne? Or a two dollar tooth brush, for that matter?

      The Germans are nervous about the euro. They’ve been through at least three currency transitions in a few generations time, and they also took a haircut on the euro transition. This is fleeing to safety, pure and simple.

  3. Very Serious Sam

    It is a bit of an exaggeration to call this a bubble. The prices skyrocket not nationwide but mainly in a few hotspots, like Munich and Hamburg – but there they did it since decades. It is not a recent development, as Richter tries to suggest.

    There is another reason the bubble, if it exists and if it once bursts, won’t have dramatic consequences to the society in general, compared to the events in the US, Spain, Ireland…

    Which is the fact that the finanings are much, much more conservative than in other countries and the securization as well.

    So don’t bet on a busting housing bubble in Germany. You better focus on solving the still huge housing issues in the US, Spain, Ireland…

    1. Bill C

      VSS, I agree with your skepticism re: Germany housing bubble.

      In addition to the very conservative financing, the Germans in general are VERY circumspect with respect to spending.

      I can’t see them running out to buy houses to flip, particularly if they’re putting 40% or more down. Germans buy houses to live in, and they’re pretty permanent.

  4. Kiste

    I am not sure if this can be called “a bubble”, this seems like hyperbole to me. If there is a bubble of any sorts, it’s restricted to a few cities like Munich.

    1. It is generally accepted here in Germany that rental property is not a particularly good investment in the long run, considering that the population in Germany is stagnant while new housing is constantly added.

    2. A lot of this supposed “bubble” is localized in areas like Munich and Hamburg, all places that are suffering from a severe housing shortage to begin with. Particularly in Munich, this isn’t even a new phenomenon, it’s been going on for years.

    3. It cannot be understated that inflation fears and capital preservation are huge drivers in this – it’s definately NOT a speculative bubble except maybe in a few very limited locales like Munich.

    4. The selling of state-owned apartments has been going of for 2 decades now, it’s not evidence for a “bubble”.

    I’m simply not seeing the the kind of speculative housing bubble with huge expansions of construction activity that we had in Ireland, Spain or the USA (hell, you can’t build anything in Munich unless you tear down something old). I also don’t see people using their homes as ATMs. There might be some minor speculative bubbles in places like Munich but that’s it.

    1. Tyzão

      I saw some tract housing down by Tegel Lake, maybe associated with the new Berlin-Brandenburg airport…also agree with the selling housing from the state to consortiums seems to be common, gagfah is a big company for that, but I’m sure there are others. In general I agree with your post.

  5. IF

    Ack. Wolf Richter might want to start reading on interest rate changes and NPV. 8 percent is not enough when rates go from 5% to 3% p.a. The question is, will it overshoot? If yes, then for fear not greed (of the population) and only if the ECB has the balls to go against this fear. Greed would be so much easier!

    1. Ignacio

      If it goes on, a consumptiom boom driven by wealth effect should be seen. The good news would be that this should fuel import increases (from elsewhere including eurozone periphery), and that goes in the correct direction if commerce imbalances are to be reduced.

      Some housing bubble in Germany would help the rest of the eurozone.

  6. Marcel

    I think this is indeed hyperbole. Maybe for some hot towns or neighborhoods, but as a whole, no way. When I was delivering a training in the southernmost part of the Netherlands, one of my students told me of his housing problems. The price for his run-of-the-mill house was relatively low, compared to what you would pay in my neighborhood. That was because of the competition of the neighboring German villages, where prices are even lower.

    If you’re talking about a bubble, which is slowly but steadily deflating, then it’s in the Netherlands. The housing market has almost ground to a halt. Banks are very reluctant in offering mortgages and only for limited sums of money.

  7. 4runner

    Any housing bubble is a response to the Euro-crisis.

    There are two ways out of the Euro crisis– a) deflate the periphery or b) inflate the core.

    With daily news reports of riots in the streets of Greece and strong memories of the Weimar hyperinflation, many Germans believe that b) the core will be inflated. If you believe that, the logical thing to do is to move into real assets.

  8. Tyzão

    Well, I’m not so sure about this article at all. I don’t doubt there is a certain amount of zeal about owning a home, but I have a hard time finding a factual basis from the article. First, my personal experience is that in the old west Germany, for example the Rheinland, zoning laws are pretty serious business, so a developer couldn’t just move out into the country, find some farm somewhere, and start building tract housing til ones heart is content, as we have done so much of in the USA. It does happen, but not nearly to the degree as has occurred in the US, or moreso, in places like west Africa (the king of ag to low density res, urban sprawl). I would think more common in Germany is the big-box phenomenon, but it is also relatively well managed in terms of land use planning. Secondly, the property rental situation in the old east Germany is incredibly litigious and I would estimate has a huge impact on the market. There are so many crazy rental laws, rental lawyers, rental courts, rental judges, rental contracts, rental subcontracts, rental agreements, it is nearly impossibly to keep tract of it all. Berlin is often cited as an example of where real estate is a good buy, and I supposed if one had the ability to conduct a comprehensive survey of the market, there are deals to be had, but its not as cheap as it once was for sure. Kreuzberg, Prenslauerberg, and others are hip and trendy places with very diverse populations, going further south Dahlem, Zehlendorf, Grunewald are just flat out expensive.

  9. Bakasone

    Germany is nowhere near a housing bubble. It’s not as easy to get a mortgage here than in other European countries. Generally speaking you’re expected to have at least 20% of the price before a bank wants to talk about financing the rest for you. And now there are vast discrepancies between what sellers expect to get and the value of the property as banks estimate it when doing their mortgage calculations. So you might have to bring some more cash.

    Nevertheless Germans seem to fear hyperinflation (amazing in a deflationary environment, isn’t it?), so they’re willing to buy apartments and houses in Frankfurt trading at a 20% premium to what they might be worth. So far they’re burning their own money. Why would you care? I don’t think prices are sustainable in the long run, but from what I can see people buy for themselves.

    Rental apartments have never been a good business here. You may ask one of the U.S. financial investors that got burned. Sometimes it’s worth going the extra mile doing research on the local laws protecting tenants, etc. I don’t see anything like a bubble and I watch this space.

  10. Ralf T

    This article is sensationalist and factually wrong beyond belief.
    First Denmark is not part of the Eurozone and hence it´s central bank very much does have the ability to react, contrary to what this article tries to make you believe.
    In terms of what the question of a possible bubble is concerned: if the author had bothered to do any research at all, he would have he would have found slightly longer term analyses like in this 2009 McKinsey(p11) report: http://www.eclac.org/noticias/paginas/3/35143/global-capital-markets.pdf , showing quite clearly that real houseprices in Germany have slightly declined from 1970-2008.
    Now if you want to call 2 years with a slight uptick after an overall decline over 38 years a bubble, go right ahead. On the other hand, next time it might be a good idea to actually do some research, before blabbing on about markets one quite clearly does not have the first clue about.

    1. OMF

      Which will do what, exactly? Cool down the bubble? Can you give a single instance of such a tax ever actually slowing down a housing bubble?

      1. Ralf T

        I wasn´t refering to any taxes. I was just stating, that the author of the article quite clearly has no clue of what he´s writing about.

  11. Philip Pilkington

    “The irony inherent in a monetary union: even if bubbles become clearly visible in certain countries, such as Germany or Denmark, their central banks are condemned to sit on the sidelines because they cannot set interest rates.”

    They could raise property taxes in Germany if they want…

  12. Jesper

    Loan To Value of 60%? That would imply that the banks are only risking a loss if the asset falls more than 40% in value and it also implies low leverage. Low leverage will keep many out of the market, the high leverage 120% LTV-idiocy in anglo-saxon countries allowed everybody and their dog to take part thus blowing up the bubble to gigantic proportions.

    It is always good to be on the lookout for possible bubbles, but this article (analysis?) does not convince me that there is a housing bubble in all of Germany or even that there is a housing bubble in parts of Germany.

    How would the central planners who believe that the centrally decided ECB interest rate is the only, or at least the most important, factor in blowing up housing bubbles deal with the possibility that the housing market in Germany can have regions with a housing bubble and regions without a housing bubble?

    1. Very Serious Sam

      “Loan To Value of 60%? That would imply that the banks are only risking a loss if the asset falls more than 40% in value and it also implies low leverage”

      Yes. On top of that, in Germany you can’t just give the bank the keys and leave the house: you are liable with everything you earn and own to pay the mortgage back.

  13. OMF

    Coming from Ireland, I have to say that reading this is pretty galling. This is where Irish hospital and school money, sent to bail out to German banks is going. On a German property boom.

    I sincerely hope the German banks go bust and the entire German economy collapses in ash over this. Those ashes in their mouths will be the Germans’ just desserts.

      1. Kiste

        The Irish are bailing out their own banks first of all, but it’s always convenient to blame someone else. It seems that whole economies going into bubble mode and whole populations enjoying a lifestyle they have never actually earned can always be blamed on Europe’s boogeyman, Germany, once the party is over.

  14. Susan the other

    I call bullshit. Germany will never have a “housing bubble.’ Germany is frantically seeking an excuse for pesky eruptions of inflation. Inflation due to the fact that all of their money is being dedicated to pay off their banks via Greece. But nevermind the croooked trail. The reason Germany will NEVER have a housing bubble is because their is “kein platz.” They got no land to develop with the abandon required to create enough housing to call it a “bubble.” Even if it clearly isn’t a bubble in housing, but a bubble in credit. But nevermind reality.

  15. Schofield

    Haa! You have to hand it to Matt Taibbi. He was right about Banksters being like Vampire Squids they’ve quickly sniffed blood in Germany and they’re very busy creating electronic money from thin air for to create another property bubble on their spreadsheets as fast as their tentacles will allow them.

    Here’s Ben Dyson from Positive Money to explain why the Banksters have a predeliction to blow property bubbles and accordingly now slithered into Germany:-


  16. Bavaraia

    As a resident in one of the most expensive cities in Germany, named Munich, I really can’t see any house bubble.

    There simply can’t be a house bubble like in the US/Spain, etc,

    1. Because it’s nearly impossible to get a credit as a regular earner for buying a house in Munich.

    2.That’s why most of the citizen in Munich rent the apartment. Yes, the rents are high compared to the rest of Germany, but if you compare the rent for example with Milano or Zürich, you see, that the market is far from overheating.

    3.We have a LOT of cheap houses/apartments in the east or in small villages. But, most of the high income/double income families move to cities (or the suburbs)like frankfurt, düsseldorf, münchen, etc – because of the job. And this trend will cause rising prices for houses and rents.

  17. Uwe Ohse

    I’m a german, living in germany, about 80 KM from cologne.

    Indeed, property prices are rising, though not everywhere. The property prices in the city i am living in are rather declining, but that has local reasons (the city is going down, not up), and i think that similar reasons will prevent rising prices in a large number of cities through germany.
    Anyway, there really may be a bubble in the cities named in the article and more cities not named (i’d expect duesseldorf to experience rising prices, too).
    To me it looks like there is a bubble in some places.

    But there is one quirk to it which makes it quite dissimilar to other bubbles: It is not fired by speculation but by fear.
    In germany there is a strong (very strong) fear that the current european mess will lead to inflation. Many germans feel the need to protect their money (especially since the trust in our political class cannot fall much lower anymore) – and property is supposed to be a safe, though boring, investment.

    For many purposes it will not matter whether the bubble is based on fear or based an greed, but the difference is important for the question how long that bubble will last – because it will die as some as a real solution for the whole mess is found (though that seems to require some rather radical change in germany) or as soon as enough germans hear about the “Lastenausgleichsgesetz” and understand that its element “Vermögensabgabe” could happen again (de.wikipedia.org knows more about these almost forgotten words).

    I expect that bubble to die in the very moment something like the Lastenausgleichgesetz is discussed seriously. And it will be.

    Lastenausgleichgesetz in short form: A law aimed to compensate those having lost more than others in the war. It took 50% of the assets left, in form of 120 quarterly payments.

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