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Blog | 29. Juni 2016

WHO’S AFRAID OF A REAL ESTATE BUBBLE?

In light of the current low interest rate climate, investors are increasingly on the lookout for profitable investment opportunities. They have often found what they are looking for in Germany’s booming residential real estate market. This growth in interest is reflected in the steady rent and purchase price increases seen in Berlin over the last few years. Could this be the reason why concerns about a potentially threatening real estate bubble have been growing? Exorbitant jumps in real estate prices can certainly be interpreted as an indicator of an over-heated market. But this does not automatically mean that a bubble will develop. Or even that it will burst. More than any other city, Berlin has been able to weather crises in the past. In addition, given the city’s positive development, there are no signs of a hard landing in the near future.

 

BERLIN REAL ESTATE: CONTINUAL PERFORMANCE VERSUS PRICE SLUMP

In principle, the conditions for purchasing residential property could hardly be better. After the ECB cut its key interest rate to zero in March, credit is currently cheaper than ever before. Banks are offering fixed rates for ten or even 25 years. Private investors who want to purchase real estate as a long-term investment could hardly wish for a better market environment. Long-term investment strategies are based on the assumption that the value of the purchased object will steadily appreciate. After all, property prices are currently enjoying a phase of sustainable growth. If their calculation is correct, an investor should have no problem once the initial fixed rate period expires to either refinance with a bank, or pay off their residual debt and sell the property at a profit.

The exact opposite is seen as real estate bubbles burst. When property values are continuously overinflated, the market will at some point peak – and then collapse. This causes prices to fall as demand evaporates, with potential buyers waiting to enter the market in the expectation that prices will fall even further.

 

SCARCITY PROTECTS BERLIN’S HOUSING MARKET FROM OVERHEATING

It’s worth reviewing recent history in order to assess the chances of something like this happening here in Germany. During the 2007/2008 real estate bubble, which saw real estate values in some countries suddenly plummet to only a few percent of their original values, the German market did not experience any fall in real estate prices. The reason for this is that, in contrast to other European countries, there was never any speculative building boom in Germany. If anything, the gap between supply and demand actually widened. Despite an increase in building activity, there is still an obvious shortage of residential properties. This is particularly true in Berlin, where no-one has a reason to speak of a bubble.

Although rents and purchase prices have increased by about 30 to 40 percent in the last three to four years, this is in no way a sign of overheating, but much more a result of the long undervalued Berlin property market. Until a few years ago, rents and real estate prices in the German capital were at the same level as small country towns, which left plenty of room for catching up.

Beyond that, more and more people are making the capital their new home every single day. Each year there are about 40,000 new Berliners, all drawn here by the opportunities of new jobs, especially in the city’s vibrant start-up scene – by all measures, Berlin’s economy is doing great. This is also increasing wage levels. Everyone needs a place to live – and they can afford it, because prices are still relatively low in comparison to other major German cities.

All of these factors speak for the stability of the Berlin market. Even if other places should experience turbulence, the market value of Berlin real estate will still be higher than the cost of the initial investment. Once any remaining debt has been paid off and the property sold, the investment will still have paid off thanks to the low interest rates.

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Blog | 29. Juni 2016

WHO’S AFRAID OF A REAL ESTATE BUBBLE?

In light of the current low interest rate climate, investors are increasingly on the lookout for profitable investment opportunities. They have often found what they are looking for in Germany’s booming residential real estate market. This growth in interest is reflected in the steady rent and purchase price increases seen in Berlin over the last few years. Could this be the reason why concerns about a potentially threatening real estate bubble have been growing? Exorbitant jumps in real estate prices can certainly be interpreted as an indicator of an over-heated market. But this does not automatically mean that a bubble will develop. Or even that it will burst. More than any other city, Berlin has been able to weather crises in the past. In addition, given the city’s positive development, there are no signs of a hard landing in the near future.

 

BERLIN REAL ESTATE: CONTINUAL PERFORMANCE VERSUS PRICE SLUMP

In principle, the conditions for purchasing residential property could hardly be better. After the ECB cut its key interest rate to zero in March, credit is currently cheaper than ever before. Banks are offering fixed rates for ten or even 25 years. Private investors who want to purchase real estate as a long-term investment could hardly wish for a better market environment. Long-term investment strategies are based on the assumption that the value of the purchased object will steadily appreciate. After all, property prices are currently enjoying a phase of sustainable growth. If their calculation is correct, an investor should have no problem once the initial fixed rate period expires to either refinance with a bank, or pay off their residual debt and sell the property at a profit.

The exact opposite is seen as real estate bubbles burst. When property values are continuously overinflated, the market will at some point peak – and then collapse. This causes prices to fall as demand evaporates, with potential buyers waiting to enter the market in the expectation that prices will fall even further.

 

SCARCITY PROTECTS BERLIN’S HOUSING MARKET FROM OVERHEATING

It’s worth reviewing recent history in order to assess the chances of something like this happening here in Germany. During the 2007/2008 real estate bubble, which saw real estate values in some countries suddenly plummet to only a few percent of their original values, the German market did not experience any fall in real estate prices. The reason for this is that, in contrast to other European countries, there was never any speculative building boom in Germany. If anything, the gap between supply and demand actually widened. Despite an increase in building activity, there is still an obvious shortage of residential properties. This is particularly true in Berlin, where no-one has a reason to speak of a bubble.

Although rents and purchase prices have increased by about 30 to 40 percent in the last three to four years, this is in no way a sign of overheating, but much more a result of the long undervalued Berlin property market. Until a few years ago, rents and real estate prices in the German capital were at the same level as small country towns, which left plenty of room for catching up.

Beyond that, more and more people are making the capital their new home every single day. Each year there are about 40,000 new Berliners, all drawn here by the opportunities of new jobs, especially in the city’s vibrant start-up scene – by all measures, Berlin’s economy is doing great. This is also increasing wage levels. Everyone needs a place to live – and they can afford it, because prices are still relatively low in comparison to other major German cities.

All of these factors speak for the stability of the Berlin market. Even if other places should experience turbulence, the market value of Berlin real estate will still be higher than the cost of the initial investment. Once any remaining debt has been paid off and the property sold, the investment will still have paid off thanks to the low interest rates.

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