Property price hike worries Germany

German property experts are locked in debate over whether the burst property bubble in Ireland, Europe and the US started new bubbles inflating in Germany’s seven big cities.

The cost of new apartments in these cities – lead by Hamburg, Berlin, Munich and Cologne – jumped 9 per cent last year, according to a Bundesbank report.

The analysis matches anecdotal evidence of a booming German property market and a steady wave of German media reports about the rising real-estate prices.

“Experiences in other countries show that particularly an environment of low interest and high liquidity can lead to exaggerations on the property market,” wrote Bundesbank board member Andreas Dombret. “This could . . . bring with it considerable dangers to financial stability. The price rise seems to have continued in the first half of 2012, in particularly in the seven large [German] cities.”

The Bundesbank warning follows data from leading property website Immobilienscout, showing significant price rises since 2007 in inner-city Hamburg (42 per cent), Berlin (35 per cent) and Munich (37 per cent). In the same period, average countrywide German prices rose 12 per cent.

Berlin study

A Berlin property study in September suggested this hunt for prime real estate was driving a spike in inner-city prices, with this market decoupling from more moderate rises in the capital’s suburbs.

The greatest spike in prices has come since 2010, which some analysts attribute to the arrival of investors – both domestic and international – seeking a “safe haven” in German property.

Increased demand for German property is not matched by a rise in apartment building: where 600,000 new apartments were built in Germany in 1995, the abolition of tax breaks after that saw the number of new units drop to just 160,000 in 2009.

Despite the price rises, most German analysts err on the side of caution. The Bundesbank’s carefully worded report warned of the consequences of a property bubble, without saying the German market ticks the boxes for a bubble.

Property price rises are not matched by a noticeable rise in borrowing; buyers still bring an average of 25 per cent private funds to each purchase.

Though the total value of mortgages in Germany – €981 billion – rose last year by 1.2 per cent, it remains below the 2001 level. “For now the potential for a reversal on the German property market is manageable,” the Bundesbank said, though if it plans to “watch intensively” markets in Germany’s big seven cities.