D.he numbers are impressive. The Postbank and the Hamburgisches Weltwirtschaftsinstitut (HWWI) have put together for the various districts and cities in Germany how many annual rents you have to add up to arrive at the average purchase price for a house or apartment. “Multiplier” is the name of the size that comes out of it. It represents a benchmark for the valuation of real estate – similar to how the price-earnings ratio (P / E) for stocks reveals something about whether the stocks are expensive or cheap.
At this size, however, there has been a significant change in Germany in recent years. This emerges from an evaluation that the F.A.Z. is exclusive. While this value used to be an average of 17.5, as Dörte Nitt-Drießelmann from the HWWI remembers, it was recently the national average of 24. It is still significantly higher in cities such as Munich (37.2), Hamburg (36) or Frankfurt (33.5), but also in coveted districts such as Starnberg (38), Miesbach (43.2) or even North Friesland with the holiday island of Sylt. There you need an average of 72 annual cold rents to get the purchase price.
Even the Deutsche Bundesbank has warned
The big question is: Are these signs of a real estate bubble in Germany that has been inflated like a balloon in recent years – and where the corona crisis could now pop the prick like a needle?
After all, very cautious institutions such as the Deutsche Bundesbank had already warned several times of the risks posed by exaggerations in the real estate market, even if the Bundesbank economists were careful with the word “bubble”. The real estate wise men even predicted a slump in apartment prices in large cities two years ago by 2022. And Commerzbank had compared the situation at the beginning of the year with the development before the Lehman bankruptcy. Most recently, the rating agency Moody’s pointed out that German banks may still underestimate the risks from the real estate market – but above all for commercial real estate.
“We know Christmas or Easter”
There are very different criteria that economists use to determine whether there could be a real estate bubble. Unfortunately, such bubbles can only be reliably recognized when they burst. Reiner Braun, managing director of the real estate institute Empirica, which determines a so-called bubble index, cites some worrying signs. Not only has the relationship between purchase prices and rents changed. That can still be explained by the low interest rates: if the general interest rate level falls, real estate investors are also satisfied with a lower return. In addition, the relationship between purchase prices and income has shifted: real estate prices have escaped income. The Empirica bubble index therefore now shows the risk of bubbles for 229 rural districts and for nine out of twelve large cities. “We won’t know whether something will burst until Christmas or Easter,” says Braun.
On the other hand, one sign that speaks against the bursting of a bubble at the moment is the development of property prices in the corona months so far. The relatively stable development can mean that there was no bubble – or that it is just yet to burst.
“If there was already a real estate bubble in Germany, the corona crisis would have burst it,” says Jörg Krämer, Commerzbank’s chief economist. “But real estate prices actually rose in the second quarter, not fell.” Michael Voigtländer, real estate specialist at the Institute of German Economy in Cologne, argues in a similar way: “If we had had a bubble, it would have burst.”
No excessive building activity
Voigtländer also names three other indicators that speak against the existence of a real estate bubble. Firstly, when there is a real estate bubble, construction activity increases rapidly, far beyond demand. That was not observed in Germany. The Federal Statistical Office reported on Tuesday an increase in orders in the main construction trade in June compared to the previous month by a proud 12.4 percent, the construction boom is continuing. An oversupply of living space seems a long way off, says Voigtländer. Second, a speculative bubble is often accompanied by excessive lending. That doesn’t exist in Germany either. And third, with real estate bubbles, the costs for owner-occupiers and tenants of real estate often fell far apart. This is also not the case in Germany – because building interest rates have fallen faster than real estate prices have risen for a long time.
Steffen Sebastian, real estate economist in Regensburg, also emphasizes that at least the prices for apartments have continued to increase during the Corona crisis. In this uncertain situation, residential properties are apparently also in demand because they are a comparatively solid investment – a “safe haven”. “This segment of the real estate market clearly shows that the main driver of real estate prices was, is and will probably remain for the foreseeable future,” says Sebastian.
It is different with certain commercial properties. “In hotels, offices and retail, the uncertainty about future demand on the rental market predominates,” says Sebastian: “This also dampens demand on the investment market – price corrections cannot be ruled out here.”