What does it say about our views of the world when British english speakers talk about “bricks and mortar” when referring to housing and other buildings, whereas their German counterparts are more likely to talk about Betongold (literally, “concrete gold)? How do these two differing views, one highlighting unspectacular solidity and functionality, the other highlighting the value of property as a secure investment, match up with the real world? After all, it was in the UK, rather than in Germany, that the whole concept of the property ladder and the fluid buying and selling of family homes took root—and where property has enabled average people to achieve such staggering returns on their “investments.” Read on to find out about Germany’s current housing market boom, and the growing predictions of a bubble.
A concrete bubble?
An article written by Max Otte appeared in yesterday’s Wirschafts Woche cataloguing recent developments in Germany’s housing market, including:
- properties are now selling for more than €10,000 per square metre in Munich
- standard semi-detached homes in Munich’s suburbs have been changing hands for €800,000+
The author is worried that too many buyers are being lured into property purchases by low interest rates (property seems to be more affordable now than ever before, but what happens when rates rise, as they surely must?) and rising prices (buy now before it’s too late, think of the money to be made!)
All that glitters is not Betongold
The fundamental concept of real estate as Betongold—secure, solid and reliable—is, according to the author, the cause of a number of problems. Otte raises the point that “security” is actually subjective and people’s assessments of their investment options are coloured by their emotions, rather than by an objective assessment of cost, risk and returns. Many private investors are stretching themselves by taking mortgages that will become unaffordable as soon as the interest-rate honeymoon is over (even in a country like Germany with such comparatively long fixed-rate mortgages).
Otte also observes that many people have lost sight of the true value of what they are buying in contrast to the over-inflated current market value. Negative equity, where the repayment balance of a mortgage is higher than the property’s current free-market value, has been a problem for many homeowners in the UK, particularly as a result of the 100%+ mortgages that were common in the past. In Germany, where mortgage lenders typically require 30%+ deposits, it’s much less likely that similar problems will arise.
Not to forget
The remaining pitfalls of property ownership in Otte’s eyes are:
- it’s not as flexible an investment as other assets (e.g. shares)
- costs related to owning and letting property can easily increase (energy-efficiency requirements, property taxes, etc.)
- the freedom to maximise income can be curtailed (see the recently introduced Mietpreisbremse rent controls)
Property investment, at least on the smaller scale that Otte is referring to, is a long-term proposition. Any investment needs to be well considered, not impulsive.
Otte does admit that prices still have plenty of potential to rise further, especially as the market is so imbalanced and large numbers of buyers are chasing the limited supplies of housing that are coming it to market right now. Large-scale investors are under considerable pressure to invest the vast sums of cash that they have in the bank, leading to further price increases. Most experts appear fairly confident that we are still quite a distance from a potential crash. Nevertheless, as Otte rightfully points out, no investor should ignore the fundamentals and no investor should panic buy.
What do you think of recent price developments? Bubble soon to burst or long-overdue correction? Let us know in the comments section below.
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