IW report on German property market

Press Release Institute of German Economy in Cologne

No. 30/2012 August 2012

German Property market

No bubble in sight Real Estate in Germany is becoming more expensive. Since 2010, the price increases is up to 4.5 percent, what is well above the inflation rate. Especially in urban areas, the values of the flats and houses increase steadily, shows an examination of the five largest cities by the Institute of Economic Research (IW).

In Hamburg prices for condominiums raised by 31% in period from 2003-2011, in Berlin as much as per 39%. But concerns that this may lead to price bubble form similar to the USA, Ireland or Spain are unjustified. Thus, despite extremely low interest rates, neither expansionary lending nor a very high rate of purchase or resale is observed.

In addition, the rents kept pace with the development of prices.

Hence, expensive real estate appears to be rather an expression of high demand and attractiveness of the German market.

Ralph Henger, Kirill Pomogajko, Michael Voigtländer: Is there a speculative bubble at the German housing market, in: IW-Trends 3/2012 Contact the IW: Dr. Ralph Henger Phone: 0221 4981-744 Prof. Dr. Michael Voigtländer Phone: 0221 4981-741 Telephone press conference on 2 August in Berlin: 0175 9163578 (Dr. Henger) 0172 3881070 (Prof. Dr. Voigtländer)

This press release was originally published in German. The Propfund marketing team have translated the article and don’t accept any responsibilty for possible errors and are not liable at time of publishing. The original in German is also available to download from the website http://www.iwkoeln.de/de

Herausgeber: Institut der deutschen Wirtschaft Köln · Chefredakteur: Axel Rhein · Verantwortlich für den Inhalt: Alexander Weber · Telefon 0221 4981-519 weber@iwkoeln.de · www.iwkoeln.de · GraḀk: Michael Kaspers, Ralf Sassen · Verlag und Druck: Institut der deutschen Wirtschaft Köln Medien GmbH, Postfach 101863, 50458 Köln, Konrad-Adenauer-Ufer 21, 50668 Köln

Appendix to Press Release No. 30/2012 of the Institute of German Economy in Cologne

No sign of a bubble Real estate market.

A study by the Institute of German Economy in Cologne (IW) shows: The German real estate markets are healthy – despite currently observed sharp rise in prices. Which are merely an expression of a large demand and attractiveness of homes and flats.

German real estate is becoming quite expensive, especially in urban areas. In the last two years prices increased up to 4.5 per cent well above the inflation rate. Such developments bring back a lot of memories- after the financial crisis in the world in 2008, which initially started with the turmoil in the U.S. real estate market, and later Ireland and Spain also fell into a recession because of a housing bubble in a recession. But Germany is very unlikely to endure the same. The IW Cologne has examined the situation in the five most populous cities in Germany (Figure).

The highest average House prices currently hold the Bavarian Capital – Munich, with average 4,200 euros per square meter. It is followed by Hamburg (3,100) and Frankfurt (2,900). Condos in Berlin (2,200) and Cologne (2,100) are more affordable. Price trends show significant differences as well: from 2003 to 2011, price inflation for apartments in Berlin rose by 39 percent – in Cologne, inflation stood at less than 9 per cent, what’s even below the national average.

There is not even a question about price bubble, because a price bubble is based on the misled assumption of investors/buyers that the real estate value will continue increasing indefinitely. Investors bet on a higher resale price and this way artificially increase the demand.

By realizing that their expectations are too optimistic, there often is a shaft of sales - the bubble bursts and the prices tumble.

The IW Cologne has studied the following criteria in the five largest cities. Rents: If property prices increase faster than rents over an extended period of time, a correction is inevitable at some point. Cur-

Herausgeber: Institut der deutschen Wirtschaft Köln · Chefredakteur: Axel Rhein · Verantwortlich für den Inhalt: Alexander Weber · Telefon 0221 4981-519 weber@iwkoeln.de · www.iwkoeln.de · GraḀk: Michael Kaspers, Ralf Sassen · Verlag und Druck: Institut der deutschen Wirtschaft Köln Medien GmbH, Postfach 101863, 50458 Köln, Konrad-Adenauer-Ufer 21, 50668 Köln

Appendix to Press Release No. 30/2012 of the Institute of German Economy in Cologne

Expensive cities Prices for condominiums, 2003 = 100 Average prices per square meter in the first Quarter of 2012 �in Euro Berlin 130

Hamburg

138,8

2.240

Munich 130,8

3.118

Frankfurt

4.236

Cologne

2.911

Germany

2.108

122,7 120

113,9

110,5

108,5

110 100 90 2003

05

07

09

11

2003

05

07

09

11

2003

05

07

09

11 2003

05

07

09

11

2003

05

07

09

11 2003

05

07

09

11

Sources: Immobilienscout24.de, vdpResearch (Association of German Pfandbrief Banks)

rent figures show that price increases have galloped only in Munich and Hamburg - which is still a moderate pace compared with international figures. Furthermore, particularly these two cities will remain very attractive and will continue to attract more investors despite low return rates Employment The numbers of workers in the five biggest cities have evolved better than the national average. Nationwide the employment rate increased by 11.7 percent between March 2006 and September 2011, in Munich, it was by 12.2 percent, Hamburg by 16.1 percent and in Berlin by 16.6 percent. More jobs mean more income – that is a trend that continues to even go up, probably because in these cities the population continues to increase. Munich alone is expected to have nearly 15 percent more inhabitants in 2030 than today.

Transactions If the number of real estate sales increases during boom phases only based on the assumption that prices will continue to rise at the current rates, a speculative bubble is impending. This is characterized by an increased rate of property resale, which artificially escalates the overall transaction volume. Current data however shows that the demand for more real estate nationwide is higher than the supply.

Herausgeber: Institut der deutschen Wirtschaft Köln · Chefredakteur: Axel Rhein · Verantwortlich für den Inhalt: Alexander Weber · Telefon 0221 4981-519 weber@iwkoeln.de · www.iwkoeln.de · GraḀk: Michael Kaspers, Ralf Sassen · Verlag und Druck: Institut der deutschen Wirtschaft Köln Medien GmbH, Postfach 101863, 50458 Köln, Konrad-Adenauer-Ufer 21, 50668 Köln

Appendix to Press Release No. 30/2012 of the Institute of German Economy in Cologne

Only Berlin gets out of line (graphics): On the Spree, the number of items offered for sale since 2007 increased by 60 percent. Clearly, in Berlin, the transaction speed and thus the resale rate of properties has increased. Compared to the other cities, the capital has the worst fundamental data: Berlin has an old population and a high proportion to basic social and housing benefit recipients. But in terms of the criteria for rents, employment and lending, the situation is anything but worrying.

Lending Speculative bubbles are usually associated with expanding lending practices (habits): despite historically low interest rates, increases on the volume of credit for home purchases are minimal. The Germans seem to prefer paying off their loans faster in order to build a safety net in the long run. The Equity shares in the financing remain constant and in some areas they even increase.

Information from IW-Trends 3/2012 Ralph Henger Kirill Pomogajko Michael Voigtländer Is there a speculative bubble at the German housing market? www.iwkoeln.de/trends Real Estate sales in Berlin Number of flats offered for sale, each first Quarter 2007 = 100 Berlin

Frankfurt

130,8

Munich

Hamburg

Cologne

160 140 120 100

85,9

80,5

80

66,9 53,5

60 40 2007 08

09

10

11

12

2007 08

09

10

11

12

2007 08

09

10

11

12

2007 08

09

10

11

12

2007 08

09

10

11

12

Source: Immobilienscout24.de

Herausgeber: Institut der deutschen Wirtschaft Köln · Chefredakteur: Axel Rhein · Verantwortlich für den Inhalt: Alexander Weber · Telefon 0221 4981-519 weber@iwkoeln.de · www.iwkoeln.de · GraḀk: Michael Kaspers, Ralf Sassen · Verlag und Druck: Institut der deutschen Wirtschaft Köln Medien GmbH,Postfach 101863, 50458 Köln, Konrad-Adenauer-Ufer 21, 50668 Köln