Real Estate in Germany: Expensive Houses, Cheap Money - Column

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Beautiful living: This view of Berlin probably costs a lot of money

Photo: Oliver Strewe / Getty Images

A familiar ritual will take place at the beginning of the week.

Statisticians present the latest inflation figures and experts will frown with concern.

Not because the rate of price increases would be particularly high, but on the contrary: because they are very low.

On

and

, the Federal Statistical Office in Wiesbaden and Eurostat in Luxembourg will announce their estimates for the increase in consumer prices in Germany and the euro zone as a whole.

There will be no signs of inflation.

The indices are bobbing somewhere around the zero line, as has been the case for a long time, especially since Covid-19 has kept the world in suspense with shutdowns and lockdowns.

Quite astonishing: The money supply in the euro zone is currently growing faster than it has been since the boom era of the 2000s.

Sure, the figures are overstated by the great uncertainty that is causing companies and private citizens to keep cash reserves out of caution.

The economy is still down due to Corona - and with it the demand.

But over the next year, when enough people are vaccinated, activity will pick up significantly.

Then the convergence of backed-up needs, massive central bank interventions and delayed government spending programs could set in motion a price dynamic that cannot easily be slowed down again.

There is a risk, warned the economists of the asset management multinationals Blackrock recently, that the major central banks would lose control of price dynamics in the post-corona phase: Together with the structural change caused by the pandemic, “this could increase in the next five years Lead to inflation «.

Possible.

However, the experiences of the past two decades have been different: Despite the largely loose monetary policy, price pressure is low, because the global supply of goods and services creates highly intense competition that has slowed inflation lastingly.

But the money that the central banks and the financial sector create is not gone.

It's just somewhere else.

Gold, stocks, houses - everything flashes

Some of the excess liquidity flows into the capital markets, where valuations are rising.

And how.

Gold has just hit new all-time highs.

In terms of corporate earnings, stocks are more expensive than ever before;

The price-earnings ratio for US stocks is currently over 30, as calculations by Nobel Prize winner Robert Shiller from Yale University show - which, in historical comparison, looks suspiciously like a price bubble.

Admittedly, there are worse things than the fact that wealthy people gamble on the stock market with overpriced papers.

But asset price inflation is now deeply affecting everyday life.

Residential properties have also long been affected.

Especially in Germany.

Those who do not already own real estate have to go into debt up to their ears

The economy is still in the corona crisis, many companies are threatened with bankruptcy, and citizens must fear losing their jobs (watch out

for new job market

numbers on

and

).

But at the same time houses and apartments are becoming more and more expensive.

Between July and September, prices rose on average in Germany by 7.8 percent compared to the same period last year.

Even in an international comparison, the price increase is rapid.

In real terms, i.e. after deducting inflation, the dynamic in this country has been higher in the past decade than in almost all comparable countries, according to the Bank for International Settlements (BIS).

Until ten years ago, Germany was the boring real estate market in the western hemisphere.

That has changed radically.

In the seven largest cities, prices for condominiums have increased by half since 2015.

It is not only the metropolises of Berlin, Hamburg, Munich, Frankfurt, Stuttgart, Cologne and Düsseldorf that benefit from the large inflow of money.

Housing prices are now rising across the board.

Even in sparsely populated rural areas, according to figures from the Federal Statistical Office, the increase was around a third over the same period.

The social consequences are serious:

• If you do not already own real estate, you have to go up to your ears in debt to buy your own four walls - or simply cannot afford to own a home any more.

• Anyone who has bought overpriced rented real estate will try to push rents up in order to generate adequate returns.

• Where rents are capped by the state, as is now the case in Berlin, investors are holding back - with the result that the supply of real estate there is likely to remain below its possibilities.

Overall, according to calculations by the Deutsche Bundesbank, residential properties are overvalued by 20 to 30 percent.

Two questions arise: Are we dealing with a bubble that is about to burst in the foreseeable future?

And: should the central banks have to curb price increases?

Germany is shrinking, at least a little

The general data for the real estate market could hardly have been more favorable in the decade:

• The population grew.

• At the same time, incomes rose continuously.

• And financing became cheaper thanks to ever-falling interest rates.

All of that pushed demand - and with it prices.

It is unclear whether these framework data will remain so on the whole.

For the first time since 2010, the population decreased slightly in the first half of 2020.

It is possible that this is the beginning of a trend reversal.

Between 2010 and 2019, four and a half million more people moved to Germany than left.

That more than made up for the shrinking local population.

Now the corona crisis has almost brought immigration to Germany to a standstill.

As far as future income developments are concerned, a lot will depend on how quickly Germany manages the rapid structural change: more digitization, more climate protection, less industrial globalization.

How well the export- and industry-heavy German economy masters these challenges will be largely responsible for the development of wages.

And indirectly also the real estate prices.

Co-working space in the country

Corona triggers a structural change that also affects the way of life, work and living - and thus the need for real estate.

After the pandemic experience, many higher-income employees will be asked how much time they should actually still spend in the office and how much they want to be active in the home office or elsewhere.

New life and work models can be realized.

Living in the surrounding area, where you have a spacious place to stay with a corresponding study (or have access to one of the new rural co-working offers), plus the occasional connection to the metropolis, where you might still have a small apartment or a room in a shared apartment inhabited - completely new combinations of work and place of residence are conceivable.

The metropolises, the big winners of globalization, will lose relatively in this scenario, while the surrounding areas will win.

Whereby the surrounding area increases.

That would justify some airy assessments in the countryside and in small towns.

In the cities, however, some properties are likely to become more difficult to sell.

The markets have long since reacted: Real estate investment companies (REITs) with a focus on offices and retail have lost massively in value since the outbreak of the pandemic.

If commercial real estate and hotels can be converted into living space, this should ease the situation on the inner-city housing markets - and put pressure on prices.

Every bubble bursts - at some point

So the situation is: mixed.

The fundamental factors of population and income do not have a clear direction.

The more it depends on the interest.

Should the financing become significantly more expensive, the German real estate miracle would quickly collapse.

But it doesn't look like that.

As long as inflation rates are low, the central banks will stick to their ultra-expansionary course.

Even if the price hikes pick up in the coming years, they should let things go for a while without taking any countermeasures.

The US Fed announced just that when it announced a new strategy a few months ago.

It is hard to imagine that the ECB will follow a fundamentally different course.

Added to this is the historically high level of debt, which also limits the scope for interest rate hikes.

A few years of noticeable inflation would even help with debt reduction.

However, the uncertainty about the stability of the monetary value will then probably drive further investors into the real estate markets.

It's true: every bubble bursts - at some point.

But before that happens, many, many billions will flow through the financial system.

Icon: The mirror

The main economic events of the week ahead

Monday Up Arrow Down Arrow

Wiesbaden -

- The Federal Statistical Office presents an initial estimate for the inflation rate in November 2020.

Brussels -

- Eurogroup videoconference.

The finance ministers' plan includes the annual assessment of the euro zone by the IMF, the assessment of the budgets of the euro member states by the EU Commission and the monitoring process of the former crisis countries that have received bridging aid, Greece and Cyprus.

Tuesday Up Arrow Down Arrow

Nuremberg -

- The Federal Employment Agency announces the labor market figures for November.

Brussels - For

- The EU economics and finance ministers are working their way through a long agenda - from debt relief for poor countries to the further development of the banking union to assessing the current economic situation and financial policy in the member states.

Luxembourg -

- Eurostat, Europe's statistical agency, presents a preliminary estimate of inflation in the euro area.

Wednesday Up Arrow Down Arrow

Luxembourg -

- The EU statistics

Eurostat publishes key figures on unemployment.

Thursday Up Arrow Down Arrow

Frankfurt -

- New figures on incoming orders in mechanical engineering.

Friday Up Arrow Down Arrow

Washington -

- November Unemployment

Publication.

The future president Joe Biden takes over in a difficult economic situation.