Are houses and apartments overpriced in Germany? Not at all if you look at the long run

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Chris Mulder

Jun 10, 2020
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At regular intervals we see news in the German press warning about overpriced houses. Those views are nearly all based on the relative rapid increases of the past five or so years. But frankly that is misleading. It overlooks what’s happened in the preceding 45 years.

Most notably it overlooks that when the rest of the world suffered from a house price bubble early this century, Germany saw its prices decline. Therefore Germany is in a very different place then most other countries. 

What do German house price trends really look like?

Studies that focus on the last 5 years, overlook how much German house prices decreased in the 45 years before. 

  • Firstly, they decreased in the early eighties (when interest rates were raised  in the aftermath of the oil crisis to stamp out inflation. 

  • Secondly, house prices declined following the reunification (from 1995-2012) when tax incentives led to a building boom, at a time of a declining population.

german-house-prices

The contrast with other countries is marked. Other countries such as the US and Eurozone members saw the house price double over the last 45 years. Also many countries suffered from a house price bubble when interest rates dropped following September 11, 2001. In contrast, when other countries suffered a bubble, in Germany house prices declined in real terms due to the building boom!

german-house-prices-declined

As you can see from the above figure, house prices in Europe overall and in the US roughly doubled over a 40 year period. In the US house prices showed signs of a bubble in the 1997-2007 period.

What about affordability?

As a result of the gradual real price declines houses in Germany are now much more affordable than they have been in a long time. In addition affordability has increased markedly due to the decline in mortgage interest rates. These rates fell from about 6.5 percent in 2000 to an average of about 1 percent in recent periods. Even the recent price increases have barely made a dent in the improved affordability.

affordability-perpective-germany

How do house prices stack up to rents? Do they signal overpricing?

The graph below on the right side looks a little alarming. It comes from the Bundesbank whose role is to be worried, but the left graph, with a much longer time horizon, paints a rather different picture. The ratio of house price to rent is up, but still much lower than it used to be. In Germany this ratio has always been rather high, as low interest rate and rental control tend to promote house prices. 

rental-index

So despite interest rates being at an all time low, rental yields are much higher than their historic average, indicating that house prices are historically very reasonable.

International studies say what?

Finally, we have checked international comparisons of house prices. They confirm the picture painted by the graphs above, and suggest that the German market may even be undervalued. For example, Nan Geng, in a working paper of the International Monetary Fund, suggests, that German house prices in the most recent year covered (2016) were undervalued by 10 % compared to an equilibrium. (Fundamental Drivers of House Prices in Advanced Economies, Nan Geng, July 13, 2018, IMF WP.)

In conclusion

The alarm bells don't ring very true... Our main conclusion from a deep dive in German house prices is that German house prices are not overvalued. Of course if interest rates shoot up, and somehow Germany loses control over inflation or basic fiscal parameters, house prices will no longer look so favorable. Also if Germany were to decide to amplify housing supply massively, e.g. create entire new cities, the housing world will look different, as land cost would come down. But we see no appetite or plans for this. 

Based on current interest rates, and rates to rent and income, house prices are very affordable and from a historical perspective have considerable room to grow.

Nonetheless always check the valuation of the house or apartment you are considering to buy. You can do so by signing up on our website. It also does pay to see a lot of properties that are on the market! 

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Chris Mulder

Chris is a former Senior Economist from the World Bank and IMF. He is a Hypofriend Co-founder.

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