Global Economics

Why the Property Boom Bypassed Germany


In the last decade, home prices have risen across the Western world. So why has one European nation remained in a slump?

If you were to buy a house in Germany today, chances are you would pay the same amount as you might have 10 years ago. While house prices have shot up at staggering rates in many industrialized countries, Germany's housing market has been in the doldrums: An average detached house in Germany today costs virtually the same as it did a decade ago.

Not so in many other Western countries. There house prices have climbed to dizzying heights in the last 10 years and now threaten to — and in some countries have already — come crashing down. Right across the Western world, from Australia to Spain to the US, property prices more than doubled, but not in Germany. So why is Germany one of only a handful of economically developed countries to have completely missed out on the global property market boom?

And what does this mean for Germany's housing market in the future? For several years now some property experts have been touting Germany as the next hot housing market. Lured by remarkably low prices, property investors from the United Kingdom and Ireland have been snapping up real estate, especially in Berlin. But just because German property is relatively cheap, is it a safe bet that prices will rise?

Post-Reunification Exuberance

To understand why Germany's housing market has been in the doldrums for the last decade you have to go back to the early 1990s. In June 1991, eight months after reunification, a law designed to revive the economy of former East Germany, called the Fördergebietsgesetz, came into force. It offered incredibly generous tax incentives to property investors: Anyone who renovated or built real estate in the former East or Berlin, could write off the entire cost of the investment from their taxable income over 10 years.

Many wealthy West Germans leapt at this once-in-a-life-time opportunity, including some of Germany's biggest celebrities — such as TV presenters Thomas Gottschalk and Günther Jauch — to a former foreign minister Hans-Dietrich Genscher to lawyers, dentists and managers. They all poured money into real estate, ranging from single flats to giant office complexes and housing estates.

Buoyed by the generous tax breaks, Germany's property market boomed in the early and middle 1990s. Between 1990 and 1998 — the year the tax incentives finally expired — the price of buy-to-let properties rose by around 70 percent. But the policy also helped to create a real estate bubble.

"Effectively, the tax incentives were so generous that people over-invested and that meant there was a glut of supply in Berlin, for example," Julian Power, director of London-based Berlin Capital Investments, which advises individuals and companies on investing in German real estate, told SPIEGEL ONLINE. "People could renovate a property and they couldn't lose, as they could write off the whole cost against their tax bill. ... So people were doing it whether or not there was a demand for it."

Boom Turns to Bust

But in the rush to take advantage of the incredible tax break, many investors seemed to have forgotten to ask themselves whether there really was demand for the property they were building and renovating.

"After 1998 a sobering of the market set in," Jürgen Michael Schick, vice-president and spokesman of Germany's Real Estate Association (IVD), which represents property advisers, brokers, administrators and experts, told SPIEGEL ONLINE. "The tax incentives no longer existed and in the 1990s investors had built over and above market demand."

As the housing market bubble burst, investors' exuberance turned to gloom. While house prices at the end of the 1990s were rising — and kept rising for the next decade — in many industrialized countries, Germany's housing market entered a prolonged slump. According to the Economist's global house price league table, the average value of homes doubled or even tripled in many countries between 1997 and 2007. In Britain house prices rose 210 percent, 190 percent in Spain, 168 percent in Australia and 104 percent in the US.

Germany, however, is one of only a handful of economically advanced countries not to experience a housing market boom in the last 10 years — prices there have stagnated. According to research by Germany's Real Estate Association, which was carried out in 150 German towns and cities, the price of a detached home in 2007 was virtually the same as 10 years earlier.

"What you had in the last one, two, three, four years in many other Western countries — the kind of property bubble in England, in Ireland, in Spain and in the US — that's, in principle, what we had in Germany in the 1990s," IVD's vice-president Schick said. "And because of this price correction, we were kind of immunized against the euphoria over house price rises that gripped many Western industrialized countries. That's why Germany was the real exception. ... Admittedly, on top of that came the economic difficulties around the millennium, which have only started to lessen in the last few years."

During the last 10 years Germany struggled with periods of sluggish economic growth — actually going into recession in 2001 — and record unemployment. The bursting of the Dot Com stock market bubble in 2000 also hit the country hard, sending the DAX-index, which tracks the Frankfurt stock exchange, crashing to the ground.

The stock market crash, however, did not encourage investors to pour money into real estate, which generally is seen as a safe bet. Too many investors, who had got their fingers burned when the housing market bubble burst at the end of the 1990s, were reluctant to take that gamble again.

According to Power, of Berlin Capital Investments, many Germans had lost a lot of money when the housing market crashed. He said: "Dentists from Munich and Hanover who renovated five buildings and then refinanced and refinanced and borrowed far too much money, suddenly found that the rents were not coming in as expected. A lot of those people went bankrupt."

Foreign Investors Eye a Bargain

Against the international trend, house prices in Germany actually fell between 1998 and around 2003. As homes have become increasingly unaffordable in many industrialized countries, more and more people have struggled to get a foot on the property ladder. In Germany, however, because the international housing market boom bypassed the country, property has become relatively cheap — which did not go unnoticed by large-scale property investors.

Since 2004, the year in which the German housing market hit rock bottom, institutional investors have snapped up hundreds of thousands of homes — some at bargain prices. The companies were aided in their acquisitions by the fact that German companies and the federal and regional states — which once owned much of Germany's housing stock — were trying to unload the homes from their books.

In 2004, for example, US private equity firm Fortress bought 82,000 Berlin apartments from the federal government's social security and pension agency in a €3.5 billion ($4.3 billion) deal. The same year Morgan Stanley acquired 48,000 properties from Thyssen Krupp, an industrial group, for €2.1 billion ($2.8 billion). The following year UK private equity firm Terra Firma bought 150,000 flats from German energy firm E.ON for €7 billion.

According to IVD's Schick, the German property market in 2004 must have looked like a "dream opportunity" for foreign investors. Prices had fallen, but were now stable. Property was relatively cheap compared to many other European countries. And home ownership, at 43 percent, was — and still is — one of the lowest in the industrialized world. On top of that, investors could buy property in Germany and get a yield of 7 percent when borrowing costs were only 4 percent. It was "sensational," Schick said.

Will Prices Rise in Germany?

As the German economy has recovered in the last few years, so too has the country's housing market. Since 2004 the price of buy-to-let flats in big cities has especially increased.

But even though some housing market experts predict price rises in the future, a property market boom in Germany is a long way off. According to the UK's Royal Institution of Chartered Surveyors' European Housing Review 2008, "a national house price upswing does not seem to be in the offing." It added: "However, in some places — like Hamburg, Nuremburg and Munich — local markets are much more active than the overall national pattern."

According to the review, Munich — which has the highest property prices in Germany — saw the highest price rises in the first half of 2007: a 6 percent increase. But, in other areas, especially east Germany, over-supply and weak local economies will keep the housing market flat or depressed, it said.

Schick, of the IVD, said house prices in Germany were not likely to rise in the near future, apart from in the big cities. "But even there," he said, "if you compare it to what has happened in the UK housing market, for example, were price went up by up to 200 percent, we're not talking about anything like that. We expect price rises of about three to four percent a year, which in the past were the monthly rises in the UK."

But some housing market experts are far more upbeat about the long-term prospects for the German property market. Power, who advises individuals and companies about buying real estate in Germany, said the current market presented a "very interesting opportunity." According to Power, Germany's very low home-ownership rate of 43 percent — 12 percent in Berlin — is likely to increase in the future. Rents, which have been kept artifically low by large public housing companies that once owned large swathes of housing, are likely to rise because state governments are forcing these companies to sell property in order to offload some of the states' debts, Power added. And as rents rise, more people will want to buy their own homes. On top of that, according to Power, too few new homes are being built to meet future demand.

"Basically, what that means over time is there's going to be a shortage of housing," Power said. "And if there's a shortage, then rents will have to rise. So, it becomes economical for people to invest in housing and so on and so on and that should mean rising rents and rising prices. But the point is that this is not going to happen tomorrow. It's going to take the next five years, probably, to follow through."


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