Why German property boom has got further to go

March 17, 2017 08:58
Low mortgage rates are steering more Germans toward properties. Photo: Reuters

For many people, the prospect of investing in residential property in Germany has never really stacked up as a viable option.

Germans seem happy with long leases that allow housing without the need for debt or the stresses of landlord responsibilities. This attitude has led to fairly flat growth in house prices.

However, many foreign buyers are starting to scan the globe for safe havens. Germany, with a steady and relatively balanced economy, is starting to look attractive.

Mortgage rates plunged as the European Central Bank moved to negative interest rates, fuelling the trend even further.

These winds of change have somewhat steered the Germans towards property – a steady, low risk and tangible asset at a time when the currency is fluctuating and the short- to medium-term story is likely to remain one of uncertainty.

We would attribute a lot of this capital value growth to the fall in interest rates, some of the lowest interest rates on record.

For many well-off Germans with permanent jobs renting no longer makes sense.

Commerzbank, the country’s second-largest lender, offers a mortgage with an ultra-cheap 10-year fixed rate of just 0.94 per cent.

There are indications that Germany is experiencing a property boom and it’s got further to go.

Another driver for the rental market may actually stem from the the spike in population due to the refugee crisis.

This influx of more than one million refugees has led to a housing demand that the market is struggling to keep up with.

Trying to estimate how many refugees will ultimately stay in Germany, where they will choose to live and how many will bring their families to join them is a difficult task.

However, even if a small percentage decide or are obliged to stay, Germany will need to do better and provide more housing supply.

The country built around 270,000 new apartments in 2015 but that figure needs to rise to about 430,000 a year until 2020 to meet the shift in demand.

The German government is planning an increase in funding for public housing as part of its 2017 budget plan.

There is also talk of relaxing building rules but this will take some time. The government is also dealing with public outcry over rising rents.

The German government introduced a cap last year limiting rent increases to 10 percent above comparable local rates.

New apartments are exempted, though, so there is still a growing market for foreign investors.

Any political interventions in the housing market unnerve investors and may also dissuade much needed construction.

The combination of the increase in demand and a still limited supply is currently creating an exciting investment environment.

It remains to be seen how the German election and other potential shifts in the European market will affect the politics and tax arrangements for investments.

One will have to weigh the strengths of the economy, the effects of migrant-driven housing boom and the directions of the interest rate to decide if the German market, along with the euro, is worth investing in.

While it is certainly a stable diversification for Asian investors, we would caution that the upside potential might not be worth the downside risks.

This is particularly true when compared to the more tested buy-to-rent markets around the world.

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Portfolio consultant of RunningStream(S) Pte Ltd.