Whether or not a real estate bubble is looming or indeed about to burst on Germany’s housing market has been subject to public debate for years. Warnings of looming dangers have been voiced off and on—but inevitably qualified by the admittance that there is currently no bubble in sight. It happened again a short while ago, when Bundesbank presented its latest financial stability report (source: www.haufe.de).  

No Evidence for Debt-Driven Speculative Dynamics

Residential real estate in German cities were overvalued by 15 to 30 percent in 2018, the report suggests, adding that some private households and banks make “overly optimistic forward projections of the historic trend” when predicting the price development (source: www.bundesbank.de). But elsewhere the report observes that there are currently “no indications for a spiral of fast-rising residential property prices, excessive growth in mortgage loans and eroding standards in bank lending.” Analogously, Bundesbank Vice President Claudia Buch is not aware of any debt-driven speculative dynamics either.

Before that, in summer of 2019, the DIW German Institute for Economic Research and Empirica had warned of an increased bubble risk on the residential property market. But the DIW simultaneously drew attention to the fact that the perfectly normal lending practice and the long average fixed-interest periods for real estate loans suggest sound financing fundamentals and speak against a price bubble (source: www.haufe.de).  

Housing Construction Stagnating, Interest Falling

On top of everything else, there is no reason to expect one of the main drivers of the property price trend of recent years—the increased housing demand coinciding with low supply—to experience a trend reversal any time soon. Housing construction in Germany has still not regained its momentum. During the first nine months of 2019, the number of planning consents issued for residential units declined by 1.9 percent over prior-year period (source: www.destatis.de). It needs to be remembered that 2018 had in turn seen a year-on-year drop in planning permissions. The downward trend is manifest even in sought-after metropolises like Berlin, for instance, where the number of approved flats decreased by 10.7 percent over prior-year period between January and September 2019.

The interest rate development does not seem to pose a major threat either for the time being. Although it was generally assumed last year that the historic interest rate trough had been overcome, interest on building loans is actually softening again after the European Central Bank signalled that the key lending rate would maintain its currently low level for a longer period of time. According to the Bundesbank, the average interest rate charged for housing loans with a fixed-interest period of more than ten years was 1.24 percent in September 2019. This is down from an interest rate of 1.94 percent as recently as September 2018 (source: www.bundesbank.de).