Is Germany’s Property Market Heading for a Fall?

After 18 months of turmoil in Europe with the Eurozone crisis, Brexit and the rise of the right wing across the bloc, one nation bucking the trend with a 'business as usual' show of strength and stability is Germany. On the verge of becoming Europe's most successful elected female politician yet (topping Thatcher) and kick starting her election campaign trail, Chancellor Merkel has clearly started as she means to go on, defeating the ruling Social Democrats (SPD) in a state election in rival heartland last week - boosting hopes of her Christian Democrat Party (CDU) retaining overall power in September's national vote.

One prominent sector of the German economy however that might find itself out of kilter with the more of the same Merkel continuum is property.

The weekend edition of "Die Welt" newspaper suggests that the real estate boom, which has seen prices hit record levels in almost all major German cities, is at the end of a seven-year-cycle and is about to "flip round." Reiner Braun, the director of the Berlin research institute Emprica, says one indicator above all is telling.

"Prices on the real estate market have risen markedly more than rents. Measured against rents, the potential for prices to decline is at 27 percent." The situation could be particularly critical in Germany's so-called A-cities, places like Berlin, Hamburg or Stuttgart. According to figures published earlier in the week, Munich rents, for example, increased by only 29 percent from 2011 to 2016 compared to 85 percent for property prices. That, say Empirica analysts, means that housing prices in the Bavarian capital could decline by as much as a third.

These potentially dark omens were publicised just days after the Bundesbank called the German real estate market overheated. The bank also cited the difference between property prices and rents. And other potentially worrying signs are downward trends among investments in real estate funds and in the stock prices of real estate companies.

"Last fall, after the stock prices of German real estate government had sometimes doubled in recent years, investors began to cash in their profits," analyst Thomas Beyerle told Die Welt. "Because stock markets deal in the future, developments there often reflect later events in the real estate markets."

Less than a year ago, despite high incidental costs of real estate transactions, the Wall Street Journal called Germany "Europe's best property market." So can the salad days have truly come to an end so swiftly? As is often the case, the picture is mixed, and expert opinion divided.

The Bundesbank has a history of fretting about German property prices - members have predicted that the market was overheating since 2013. Other analysts, citing different data, are quite bullish on German real estate. One indicator that suggests prices could in fact keep rising is the failure of construction to keep up with need.

"Especially in the big cities right now, demand can hardly be met," real estate expert Michael Voigtländer of the Cologne Institute for Economic Research told the 3Sat TV network. "Because of heavy increases in population, 30,000 new apartments are needed every year in Berlin. But only 10,000 get built, and the number of building permits issued is 22,000. The shortage remains. That's why rent will keep going up in many cities."

Perhaps not surprisingly, institutions pushing property to investors are quite sanguine about the market's prospects. In a report published last month, Deutsche Bank cited high demand, insufficient construction and extremely low vacancy rates to argue that that the real estate markets in Munich and Berlin were still very robust.

"All the macroeconomic conditions that might signal an end to the cycle - such as a turnaround in interest rate policy, a massive expansion of supply and/or a slowdown in migration to Germany - are not yet fulfilled and it is likely to be several years before they materialize," the report concluded. "Consequently, we expect rents and property prices in the major German cities and across the country to continue to rise sharply in 2017."