Reinhard Panse's Perspectives
Reinhard Panse's Perspectives
Podcast
29.10.2021
The major bank UBS published a study in October that could make German real estate buyers nervous. The Swiss bank analyzed the cities in which the housing market is particularly overheated. With Frankfurt am Main in first place and Munich in fourth place, two major German cities are also included. They are far ahead of cities that are traditionally considered overpriced, such as London, New York or San Francisco. So have we overlooked the risks on the German real estate market in our recent analyses?
If we look at the questions posed by the UBS analysis, we can say: No, German real estate is actually undervalued in terms of the market as a whole. Let's take a look at the individual aspects that constitute a bubble according to UBS.
A high level of lending for property purchases: in Germany in particular, interest and repayment rates are very low in relation to household income and are only undercut by Italian private households, which are known to have particularly low levels of debt. With such a low financial burden from existing debt, the average German household could certainly increase its debt. The statistics do not confirm a price bubble on the German residential real estate market as a whole.
Excessive construction activity: Although the number of newly built apartments has risen significantly again to over 300,000 since the low point in 2009, the year of the financial crisis, when only 162,000 units were completed, this is also a rather low figure. The last German construction boom was in the period after reunification, when special depreciation allowances were available to boost construction activity, particularly in the new federal states.
House prices are rising faster than residents' incomes: over the past few years, Germany has indeed fulfilled the third bubble criterion. However, this does not yet answer the question of whether real estate has become unaffordable in Germany and prices will therefore soon have to fall. The costs of mortgage financing must also be taken into account. With conservative assumptions, however, financing costs in Germany have almost halved; it is possible to service a mortgage loan in Germany that is almost twice as high as it was 15 years ago.
House prices are rising faster than rents: At first glance, this bubble criterion might appear to pose dangers for Germany. In 2013, the gross rental yield was just as high as 3.8 percent as it was in 1975, only to fall to 3 percent today. However, this decline pales considerably when you consider that although the average rental yield was 3.9 percent between 1975 and 2013, the average mortgage rate was actually 1.5 percentage points higher at 5.4 percent. If we take the average mortgage interest rate of the last 20 years as the expected future financing costs of 3.5%, then the current rental yield is only 0.9% lower. This represents a slight overvaluation, but not a price bubble.
Of course, it may be that residential real estate prices are very high in Frankfurt and Munich, but financing is also extremely affordable in these cities. Overall, the German residential real estate market tends to be undervalued, so the results of the UBS study for the international metropolitan areas cannot be applied to the market as a whole. The future earnings prospects look surprisingly good. According to our calculations, owner-occupied apartments can certainly generate a total return in the upper single-digit range.
Reinhard Panse's Perspectives
29.10.2021
Reinhard Panse
A recent study warns that a real estate price bubble is forming in major German cities. However, if you look at the market as a whole, you will see that there is no cause for concern.
The major bank UBS published a study in October that could make German real estate buyers nervous. The Swiss bank analyzed the cities in which the housing market is particularly overheated. With Frankfurt am Main in first place and Munich in fourth place, two major German cities are also included. They are far ahead of cities that are traditionally considered overpriced, such as London, New York or San Francisco. So have we overlooked the risks on the German real estate market in our recent analyses?
If we look at the questions posed by the UBS analysis, we can say: No, German real estate is actually undervalued in terms of the market as a whole. Let's take a look at the individual aspects that constitute a bubble according to UBS.
A high level of lending for property purchases: in Germany in particular, interest and repayment rates are very low in relation to household income and are only undercut by Italian private households, which are known to have particularly low levels of debt. With such a low financial burden from existing debt, the average German household could certainly increase its debt. The statistics do not confirm a price bubble on the German residential real estate market as a whole.
Excessive construction activity: Although the number of newly built apartments has risen significantly again to over 300,000 since the low point in 2009, the year of the financial crisis, when only 162,000 units were completed, this is also a rather low figure. The last German construction boom was in the period after reunification, when special depreciation allowances were available to boost construction activity, particularly in the new federal states.
House prices are rising faster than residents' incomes: over the past few years, Germany has indeed fulfilled the third bubble criterion. However, this does not yet answer the question of whether real estate has become unaffordable in Germany and prices will therefore soon have to fall. The costs of mortgage financing must also be taken into account. With conservative assumptions, however, financing costs in Germany have almost halved; it is possible to service a mortgage loan in Germany that is almost twice as high as it was 15 years ago.
House prices are rising faster than rents: At first glance, this bubble criterion might appear to pose dangers for Germany. In 2013, the gross rental yield was just as high as 3.8 percent as it was in 1975, only to fall to 3 percent today. However, this decline pales considerably when you consider that although the average rental yield was 3.9 percent between 1975 and 2013, the average mortgage rate was actually 1.5 percentage points higher at 5.4 percent. If we take the average mortgage interest rate of the last 20 years as the expected future financing costs of 3.5%, then the current rental yield is only 0.9% lower. This represents a slight overvaluation, but not a price bubble.
Of course, it may be that residential real estate prices are very high in Frankfurt and Munich, but financing is also extremely affordable in these cities. Overall, the German residential real estate market tends to be undervalued, so the results of the UBS study for the international metropolitan areas cannot be applied to the market as a whole. The future earnings prospects look surprisingly good. According to our calculations, owner-occupied apartments can certainly generate a total return in the upper single-digit range.
About the author
Reinhard Panse
Reinhard Panse is Chief Investment Officer and co-founder of FINVIA Family Office GmbH. Until February 2020, Reinhard Panse was a member of the Management Board and Chief Investment Officer for HQ Trust GmbH, which is owned by the Harald Quandt family. From 2004 until joining HQ Trust GmbH in 2011, Reinhard Panse was Chief Investment Officer of the UBS Sauerborn business unit created within UBS Deutschland AG. From 2001, Reinhard Panse was a member of the Management Board of Sauerborn Trust AG and its legal predecessors. He was responsible for the investment strategy and played a leading role in the holistic asset management and administration of large private assets. Reinhard Panse began his career by taking over capital market and client support activities at Feri GmbH in 1989, after having founded and managed his own wealth management as managing director.
