German housing market: Prices continue to climb, but for how much longer?
The rise in rents and prices in the housing market continues unabated. Purchase prices for owner-occupied homes have soared by 7.5 percent on the year nation-wide, at a pace that looks set to break records. With the increasing strain on “homes”, the tense situation in the housing market is becoming ever more of a political issue. With rent caps, special write-down schemes, family housing subsidies and the housing summit held in September in the Federal Chancellery, the current government is seeking to improve the situation for tenants and buyers alike. There are scant prospects of success as the property market lacks flats, not regulations or money. Both make the problems greater: The massive swath of existing regulations facing builders and landlords tend to constrain housing construction, while public subsidies simply further stoke prices.Despite calls for it in order to ease the market situation, the expansion in housing construction will be hard to realise. Even if the target of 400,000 new-build apartments a year is achieved, this will hardly swiftly eliminate the shortage in housing, which has accumulated down through the years. In fact, it could be considered a success if the number of new builds tops the 285,000 mark reached in 2017. However, there is a dearth of building land, the approvals processes are often protracted, and the construction industry is already operating at as good as full capacity. In addition, proposed new-build projects often meet with opposition from residents because the population influx into cities reduces the amount of space available.There is unlikely to be any major improvement in the housing market supply side in the foreseeable future, meaning future market trends will mainly be determined by levels of demand. Initially, the willingness to buy will remain high. After all, labour market conditions are superb. And mortgage rates are likely to remain low until into next year. Yet even if interest rates climb, a minor increase is something most will probably absorb. Indeed, three percent interest on a mortgage loan is still favourable, as only a few years ago house and flat buyers had to get by with far higher rates. Admittedly back then, the loans required were smaller. According to current figures, the average loan financed has risen by almost EUR 100,000 between 2007 and 2017.Low interest rates of at present 1.8 percent for building financing mean that even a moderate rise in interest rates would lead to a clear decline in the maximum possible loan amount. Assuming property financing accounts for 30 percent of income and a 2 percent annual redemption rate, given current interest rates a household can afford a loan of about eight times its net annual income. If interest rates rise to 3 percent, the loan drops to a multiple of six, and at 4 percent interest to one of only five. In other words, even moderate rises in interest rates together with the surge in purchase prices, which in some cities have reached exorbitant levels, have the potential to appreciably dampen demand.Prices are still climbing at the moment. Alongside low interest rates, family housing subsidies fuel demand. As a result, the prices for owner-occupied homes look set to rise next year too, at the relatively high pace of 5-7 percent, and thus move the housing market close to peak price levels. What are then even higher prices and the probable gradual increase in interest rates may then bring the price rises to an end, however. Above all the expensive conurbations are susceptible to price falls. That said, a price collapse in the market as a whole is less probable. Should, contrary to expectations, a sharper correction emerge, moderate private household debt levels limit the potential damage. Things could get exciting in a few years’ time when favourable mortgages from the boom phase need to be prolonged and buyers suddenly face far higher bills for their loans.Even a moderate interest rate hike would considerably dent buyers’ financing scope