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Real Estate

08 September 2015

BUBBLE TROUBLE? 

One of the few developed nations not to have experienced a major housing-price bubble this century, Germany has long been regarded as one of the most stable real estate markets.

Today, however, a combination of loose monetary policy, a weak euro and domestic recovery are making German policymakers and institutional investors anxious that a property bubble might be developing.

In the second quarter, residential and commercial property prices were up 4.9% year on year, according to the Association of German Pfandbrief Banks, which represents the country’s leading providers of real estate finance.

Germany’s second-largest landlord, Deutsche Wohnen, is scaling back acquisitions and refinancing debt, arguing that the market is becoming prohibitively expensive and that rents no longer justify the prices being paid. UK-listed property group Grainger has also sold its assets in the country to take advantage of the strong market.

Policymakers are keenly aware of the problem. In June, Berlin became the first German city to introduce a rent cap, preventing landlords from charging new tenants more than 10% above the local average. Berlin rents rose 40% between 2003-11 and by more than 9% between 2013-14.

However, some analysts argue that the German property market is likely to keep growing. The domestic economy is solid, while monetary policy in the eurozone may be too loose for its stronger members. The weak euro is also attracting in foreign investors, while rock-bottom bond yields continue to drive investors toward assets that produce better returns.

Policymakers in Germany may be more willing to intervene to calm the market than in countries like the UK. For the moment, however, the unaccustomed frothiness of German real estate appears set to continue.