Draghi-fuelled housing bubble worries Germans
Anna Pesch had long assumed she'd be a renter for years to come, but this month she's buying a three-bedroom house near the German city of Cologne. She's got Mario Draghi to thank for that.
"We didn't want our money to keep going into rent," said Pesch, a 32-year-old speech therapist who started looking for a home two years ago, around the time European Central Bank chief Draghi dropped the benchmark deposit rate below zero. "We prefer to invest," Pesch said, "especially since prices in our area just keep going up."
With record-low costs for mortgages and savings accounts earning almost nothing, Germany is warming to real estate investing. For decades, Germans showed a strong preference for living in rented apartments and stowing cash in the bank, but that tradition is fraying as the ECB keeps interest rates near zero. In the past five years, housing costs in Berlin, Hamburg and Munich have jumped by more than 30pc, prompting official woory over rising prices.
In March, Bundesbank board member Andreas Dombret said he sees "clouds gathering on the horizon" and that the central bank is keeping a close eye on mortgages. Finance Minister Wolfgang Schaeuble, who has been critical of the ECB's policy of goosing growth with cheap cash, in December said the hunt for yield could lead to the "formation of bubbles and excessive asset values." And German regulators have called for new rules to prevent "credit-driven overheating" in the real estate market.
With employment and wages rising, home prices in Germany started climbing in 2005 after a decade of stagnation. The wealth gains coincided with a demographic shift as Germans abandoned the countryside for revitalized cities such as Berlin and Frankfurt, pushing vacancies in those places near all-time lows. New mortgages jumped by 22pc in 2015 after five years of rising at 3pc or less, according to the Bundesbank.
Developers have been slow to meet the demand. Building permits are at a 15-year high, but they remain about 13pc shy of the 350,000 new homes the government says are needed annually. In the past year, refugees have further strained the housing market.
"Historically Germans haven't participated in asset bubbles, but you can't rule it out," said Jochen Moebert, an economist at Deutsche Bank. He says that for the first time in recent memory, housing inflation is being driven by low rates and a lack of supply rather than values catching up with wages.
Thanks to the ECB, financing costs on a two-bedroom apartment in Frankfurt are lower than they were five years ago, even after accounting for the growth in prices, according to Moebert. If the pace of price increases picks up, "we could start to see risks to the financial system" as banks make loans based on unrealistic valuations, he said.
Germany remains far from the excesses seen in the booms of the past decade in the US, Spain, and Britain. Only 53pc of German families own their homes, versus an average of 70pc across Europe and 64pc in the US, official statistics show.
Even so, as prices nationwide have gained 27pc in the past five years, the housing industry is running "at full capacity," said Andre Adami, an analyst at property-market researcher Bulwiengesa. "And real estate agents are making the money of their lives."
Brokers occupy increasingly posh offices in newly gentrified neighborhoods. Celebrity architects such as Daniel Libeskind and Frank Gehry have been hired to design tony apartment buildings in central Berlin. And new crowdfunding websites offer Germans the chance to invest in everything from luxury apartment complexes to waterfront resorts.
The boom is attracting institutional investors from across the globe, boosting the stocks of German landlords. An index of their shares has jumped more than tenfold in the past five years as companies have issued shares, merged and expanded, according to the European Public Real Estate Association. Germany's biggest landlord, Vonovia, last year joined the 30-stock DAX index alongside global heavyweights like Daimler, Bayer, and SAP.
One group is ruing the change: long-time investors in real estate. Thomas Schnell, a 56-year-old electrical engineer from Berlin who for the past decade has been buying apartments to rent out, says it's getting harder to find deals as low interest rates draw purchasers into the market.
He keeps buying though, because he expects to sell the apartments at a profit later on. Schnell recently purchased a one-bedroom apartment in Berlin's Schoeneberg district, in a landmarked 1950s building with high ceilings and wide pine floorboards. He chose a 15-year mortgage, with a slightly higher interest rate, rather than a cheaper 10-year loan because he doesn't expect Draghi and the ECB to keep flooding the economy with cash forever.
"You shouldn't be led astray by the low interest rates," he said, noting that some bidders are buying homes where the rent won't cover the borrowing costs. "I stay away from the expensive stuff. It has to make financial sense."