German real estate is booming. But is “concrete gold” worth it?

So we’re likely to see more Germans investing that spared money in housing, known here evocatively as Betongold – or concrete gold – for its purported value-retaining qualities. But another sharp German name Torschlusspanik – the fear that a door is about to close – sums up the current mood.

Those who seek salvation in housing know that they join the party quite late. House prices have been rising for more than a decade and lately the pace has picked up – a Europace index of German house prices was almost 15% higher in February than the same period a year ago . Postbank property manager Eva Grunwald believes the latest push was driven by concerns about inflation and rising interest rates.

Soaring construction costs and an insufficient supply of new homes are also driving up prices. And owners may be reluctant to sell because cash proceeds will quickly lose purchasing power. Listings on the popular German property portal Scout24 SE fell by 12% last year.

When I moved to Berlin in 2008, locals rarely discussed property prices (refreshing, I thought, coming from Britain). The real estate market had been slumping for years and rents were incredibly low.

Looking back, it was a fantastic time to buy a home. Since then, falling mortgage rates, coupled with strong demand for urban housing, have fueled an astonishing boom. House prices have more than doubled on average, and in fashionable districts of Berlin and other major cities they have risen much more. While housing construction has picked up, the roughly 300,000 units completed each year are 25% below the new government’s target.

It would, however, be an exaggeration to claim that Germany has become a nation of real estate speculators. The country still has the lowest home ownership rate in the European Union. The EU average is 70% and around 65% of US households own the property they live in. In Germany it is around 50%.

Germans do not switch houses for a quick profit because transaction costs and taxes are high. Lending standards have also remained quite strong. Borrowers typically put down a 20% down payment and choose to pay off the debt fairly quickly, so they have plenty of equity.

Until recently, they could lock in rates below 1% for more than 10 years, so most are not exposed to the recent rise in mortgage rates. Although Germans are notoriously sniffy about borrowing, those who got into debt are pretty wise, as inflation reduces the real value of what they have to pay back.

The bad news is that houses have become very expensive. An owner-occupied house or apartment costs an average of 422,000 euros, according to a study published last year by the Association of German Banks Pfandbrief (VDP), requiring a deposit of around 84,000 euros. Concrete gold became an inflation hedge available only to the wealthy.

Last year, Germany’s financial capital, Frankfurt, topped UBS’s annual survey of bustling urban property markets, after seeing inflation-adjusted prices rise by 10% a year, on average. , since 2016. The affluent city of Munich ranked fourth, behind Toronto and Hong Kong.

Purchase prices have far exceeded income gains and rent increases, which are heavily regulated. In major cities, a landlord now needs 35 years to recoup the purchase price when renting out the property. It’s a long wait.

Of course, this gap between the purchase price and rising rents somewhat undermines the idea that real estate will provide inflation protection for those who buy now. Yet Germany’s largest publicly listed landlord, Vonovia SE, reassured investors this month that rents should keep pace with rising construction costs and property values, albeit with some time lag.(1)

There are also risks for banks that have lent against these expensive real estate collateral at very low rates. The Bundesbank warned in February that homes were now overvalued by up to 40%. Of course, this has been said for nearly a decade, but the longer the boom continues, the more likely it will eventually turn out to be correct.

Under pressure, Germany recently ordered domestic lenders to build up 22 billion euros in capital reserves by next year and warned them to be particularly careful when extending new mortgages.

Yet the banks will not be easily dissuaded from underwriting the property boom. German regulators have so far not tried to restrict how much buyers can borrow based on income and house prices, as demanded by EU financial risk supervisors. While most German buyers put down a large deposit, around 18% borrow 100% or more of the purchase price, so there is at least cause for concern.(2)

Unless regulators are more aggressive or mortgage costs really start to bite, the German housing bubble will likely continue to inflate.

The European Central Bank is expected to raise rates less aggressively than the Federal Reserve, reflecting continued economic weakness in parts of the eurozone. There is therefore a risk that monetary policy will remain too accommodative for a relatively prosperous Germany.

While a sell-off in bunds has pushed yields to the highest since 2018, and thus increased the cost of mortgage loans, 10-year mortgage debt pegged at 1.75% still looks attractive when inflation is more than twice. superior. Concrete gold has not yet lost its luster.

More other Bloomberg Opinion writers:

• A more resilient housing market can withstand a hawkish Fed: Conor Sen

• Soaring mortgage rates won’t reverse house prices: Jonathan Levin

• Germans should not overreact to 6% inflation: Andreas Kluth

(1) It can also automatically pass on higher investments through rent increases and thus claims that “the pressure of cost inflation does not depend on the landlord”.

(2) This usually requires a borrower to offer additional collateral, according to VDP who published the data

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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