An analysis of 200 European cities shows that housing in Germany is too cheap rather than too expensive while comparisons of prosperity between countries as well as between regions within a country show that the higher the share of the urban population and/or the higher the population density of a region, the higher the level of prosperity.


These conclusions are in a report published this month by economists at Deutsche Bank.

The report says that 62 of Europe's 100 most prosperous regions are found in Germany — "Our regional comparison for Germany shows that the more densely populated a region is, the higher the level of its prosperity. The prosperity level in the larger cities including their catchment areas was about 25% higher than the Germany-wide average in 2011. This can be explained by the fact that the presence of economies of scale gives rise to positive agglomeration effects.

In addition, regional conditions and path dependencies play a crucial part. The top 5 regions boasting the highest prosperity levels were: Munich, Dusseldorf, Ingolstadt, Frankfurt am Main and Heilbronn. Since 2000, the relative position of Ingolstadt has improved the most (+15 to 2nd place), and Wuppertal has suffered the biggest setback (-12 to 35th place). The beneficial aspects for Germany's large metropolitan regions are the comparatively favourable population structure, the more positive demographic factors and the presence of head offices of major companies. The population of Berlin increased by 3% between 2000 and 2011, and that of the larger (=second-tier) metropolitan regions by 2.3%."

The report says the analysis of 200 European cities and more than 30 countries shows that housing in Germany tends to be too cheap rather than too expensive. "This can be discerned from comparing absolute housing prices and also relative to key macro variables such as income, the unemployment rate and the participation rate. However, our simple comparisons also reveal the limits to the current house price cycle. For instance, the level of rents in major cities and also the weak population growth suggest that prices are more likely to be too high in German cities compared with other European cities."

JLL (Jones Lang Lasalle) Germany, says in a recent report that natural population development in Germany has been negative since 1972. This means that the number of births is no longer enough to maintain the population. Thus, for more than 40 years population growth has relied on foreign immigration.

"Even more important for demand in the housing markets than the increasing population is the development of the number of households. Even in years with declining population, the number of households in Germany continually increased. This development, which dates back to increasing single-person households, should continue in the future. According to the Federal Institute for Building, Urban Affairs and Spatial Development (BBSR), the growth of households will remain positive through 2025 and thus ensure additional demand in the housing market.

In 2014, around 245,000 housing units were completed. Almost half of the housing units completed were in one and two-family houses. For 2015, the BBSR expects new construction demand of around 306,000 new housing units; as such, building activity remains below demand, despite a visible increase in building permits. However, on a regional basis, the level of demand varies widely."

The influx of over 1m refugees from 2015 into 2016 inevitably will increase housing demand pressure.

Deutsche Bank in a separate commentary also this month said scarce housing is the chief feature of the current house price cycle. Despite an increasing number of housing completions there has been no decrease in the demand overhang. On the contrary, it is expanding. One reason for this is the government's housing policy. The recent introduction of a rent cap (Mietpreisbremse) has presumably helped to lower rents for a short while. "However, the medium-term impact contradicts the original objective of creating 'affordable housing.' Building activity has been sluggish particularly relative to the high price momentum and good macroeconomic environment, and anecdotal evidence shows that planned construction projects are no longer feasible and have been abandoned due to the introduction of the rent cap."

The economists say that without an expansion of supply the high demand in the major cities and conurbations will continue to drive house prices up further. This trend could in fact pick up substantially, as investors are searching frantically for safe yet relatively profitable assets. This applies not only to German institutional investors but also investors worldwide. German residential property is considered appealing thanks to solid, stable returns and sizeable spreads to financial market yields.

"For the first time in the current house price cycle we are starting to observe a phase of dynamic credit expansion. While the overall volume of residential building loans is up only slightly, new mortgage lending is showing unbridled growth. The summer months saw significant double-digit growth, with 50% jumps on the year-earlier months in some cases. Mortgage loan rates of well below 2% have unleashed a veritable boom in credit demand. Since the low-interest rate policy is likely to continue for several years, the dynamics of new mortgage lending are likely to remain high and gradually feed through to total loans."

Germany remains a nation of renters. The owner occupancy rate is just 53%, according to Eurostat, compared with 78% in Spain, 70% in Ireland and a Euro Area average of 67%. The rate has barely changed since 2010.

Impediments to home ownership, such as transaction costs of around 10% property’s value, are high while strong tenants’ rights and a big rental property market also help in maintaining a high level of renters.

An official of the Deutsche Bundesbank, the central bank, noted last January that residential mortgage loans account for 43% of all loans to the private sector in Germany. While prices in Germany over the past 20 years have been moderate compared with the rest of the Euro Area, since 2010, prices have risen by an average of 7% per year in Germany's seven largest cities. Housing prices have increased in medium-sized towns and cities by just over 5% per year. The equivalent figure for Germany as a whole is 3%.

Eurostat housing statistics

Home ownership by country, Ireland, Germany, US

German tenancy contracts can be concluded either for a definite or an indefinite period of time. "In Germany, tenancy contracts are mainly concluded for an indefinite period of time, since, to the protection of tenants, the landlord must prove one of the following three reasons for the fixed-term tenancy: (1) the landlord wishes to use the premises as a dwelling for himself, members of his family or his household; (2) the landlord wishes to eliminate the premises or change or repair them so substantially that the measures would be significantly more difficult as a result of a continuation of the lease; (3) the landlord wishes to rent the premises to a person obliged to perform services, for example an employee of the landlord. The landlord must notify the tenant in writing of the reason for the fixed-term when the agreement is entered into. Otherwise, the tenancy is deemed to be concluded for an indefinite period of time."

Pic on top: Chancellor Angela Merkel in conversation on the refugee crisis with President Recep Erdogan of Turkey in Istanbul, 18 Oct, 2015.

Dutch house price doubled in 350 years; Irish prices in 20 years