German residential property market

Deutsche Bank
DB Research
German residential
property market
November 2013
Jochen Möbert
Economist
jochen.moebert@db.com
(+49) 69 910 31727
Deutsche Bank
DB Research
Jochen Möbert
Agenda
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DB Research
1
Overvalued German housing market?
2
What are the domestic price drivers?
3
What are the external price drivers?
4
German regions
5
Bottom-line
Jochen Möbert
1
Can you spot the German residential property
bubble?
Nominal house prices
1990=100
600
500
400
300
200
100
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US
JP
DE
FR
IT
UK
CA
AU
BE
DK
IE
KO
NL
NO
NZ
PT
ES
SW
CH
EA
FI
Sources: OECD, DB Research
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Jochen Möbert
2
German house prices have increased less than
disposable income until recently
Affordability
Ratio of house prices to income
Long-run average= 100
160
140
120
100
80
60
01
IT
02
03
ES
04
GR
05
06
NL
07
IE
08
09
FR
10
DE
11
12
13
Fair value
Source: OECD
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Jochen Möbert
3
High correlation between price-to-income and price-torent ratio in Germany
Changes in price-to-rent vs. changes in price-to-income ratio
Changes in index points
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
96
97
98
99
00
01
Price-to-rent ratio
02
03
04
05
06
07
08
09
10
11
12
Price-to-income ratio
Source: OECD
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Jochen Möbert
4
Agenda
Deutsche Bank
DB Research
1
Overvalued German housing market?
2
What are the domestic price drivers?
3
What are the external price drivers?
4
German regions
5
Bottom-line
Jochen Möbert
5
Structural reforms 2002 to 2005 have strengthened
the German labour market and the economy
Germany: Labor market
Employed people (in Mio.), on the right
Unemployment rate in %, on the left
13
43
12
42
11
41
10
40
9
39
8
7
38
6
37
92
96
00
Unemployment rate
04
08
12
Employees
Source: Bundesagentur für Arbeit, Destatis
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6
Declining interest rates have increased affordability of
mortgages…
Interest rates and interest charges
%
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Mortgage rate
Share of repayment and interest rates to disposable income
Sources: Bundesbank, DB Research
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Jochen Möbert
7
…but nominal credit growth remains sluggish…
Germany: Credit growth
% yoy
32.0
28.0
24.0
20.0
16.0
12.0
8.0
4.0
0.0
-4.0
86
90
94
Mortgage
98
02
06
10
Total
Sources: Bundesbank, DB Research
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DB Research
Jochen Möbert
8
…and real credit growth has even been negative in
recent years
Germany: Credit growth
% yoy
32.0
28.0
24.0
20.0
16.0
12.0
8.0
4.0
0.0
-4.0
86
90
94
Mortgage
98
02
Total
06
10
Inflation
Sources: Bundesbank, DB Research
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Jochen Möbert
9
Low fixed income yields (opportunity costs) might be
more important for the house price boom than credit
growth
German yields
%
10.0
8.0
6.0
4.0
2.0
0.0
90
94
Rental yields new
98
Rental yields existing
02
06
DAX dividend yields
10
10year Bunds
Sources: BulwienGesa, Bloomberg, DB Research
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Jochen Möbert
10
In particular rental yields of multi-family houses are
attractive
Rental yields multi-family houses
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1991
1993
1995
1997
A
1999
B
2001
2003
2005
C
2007
2009
2011
D
Sources: BulwienGesa, DB Research
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DB Research
Jochen Möbert
11
Agenda
Deutsche Bank
DB Research
1
Overvalued German housing market?
2
What are the domestic price drivers?
3
What are the external price drivers?
4
German regions
5
Bottom-line
Jochen Möbert
12
Do foreigners invest?
Capital flows in the euro system
(as of: Autumn 2013)
16.3
Debtor and creditor in EUR bn
Major creditor
1.4
Balanced
Lux 102.7
- 59.2
Major debtor
62.9
561.5
-10.1
Sources: University of Osnabrück,
NCBs, DB Research
-41.0
-52.7
1.0
-3.6
-210.9
-68.4
-264.2
-52.4
0.6
-7.5
The next slide gives some answers.
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Jochen Möbert
13
What asset classes benefit from foreign capital?
Many questions remain open
 Details on capital inflows are rather sparse (official statistic)
 Substantial anecdotal evidence that international investors are interested in
the German residential property market.
 Rental yields around 4% (without transaction costs but also without
leverage) has the potential to attract additional capital.
 Due to its size large capital inflows to Germany should eventually go into
 German government bonds
 Property market
 Many other markets may show strong price reactions if they have to digest
large amounts of capital inflows
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DB Research
Jochen Möbert
14
Agenda
Deutsche Bank
DB Research
1
Overvalued German housing market?
2
What are the domestic price drivers?
3
What are the external price drivers?
4
Details on German housing market
5
Bottom-line
Jochen Möbert
15
Broad price indices to track the German residential
property market
Residential property prices
2007=100, sa/nsa
120
110
100
90
07
08
BulwienGesa
09
VDP
10
Empirica
11
Hypoport
12
13
ImmobilienScout24
Sources: BulwienGesa, VDP, Empirica, Hypoport, DB Research
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DB Research
Jochen Möbert
16
Large regional differences – Price development
strongly driven by supply shortages in large cities…
Nominal prices: Houses and apartments
% yoy
150
140
130
120
110
100
90
94
98
A
B
02
06
C
10
D
Sources: BulwienGesa, DB Research
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Jochen Möbert
17
…where additional demand for apartments and
inelastic supply lead to double digit price increases
Residential property prices (BulwienGesa)
1990=100
140
130
120
110
100
90
92
94
96
Single-family houses
Apartments new
98
00
02
04
Terraced houses new
Apartments existing
06
08
10
12
Terraced houses existing
Sources: BulwienGesa, DB Research
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Jochen Möbert
18
In large German cities prices of new apartments have
strongly risen relative to average income…
Affordability index: Price of new apartments (100 sqm)
to disposable income
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
96
98
B
00
D
02
F
04
HH
06
K
08
10
M
12
S
Sources: BulwienGesa, DB Research
Deutsche Bank
DB Research
Jochen Möbert
19
…but for existing apartments the development is
rather mixed
Affordability index: Price of existing apartments (100 sqm)
to disposable income
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
96
98
B
00
D
02
F
04
HH
06
K
08
10
M
12
S
Sources: BulwienGesa, DB Research
Deutsche Bank
DB Research
Jochen Möbert
20
 Affordability of apartments
(100 sqm) of 125
cities/towns
 Large range of affordability
 „Green“ – structurally rather
weak areas
 „Blue“ cities with global
champions and broad
diversified company profile
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Jochen Möbert
21
Major risk:
Market interventions
 All four German parties in the
Bundestag have some preference
for interventional politics.
 But market interventions will not
reduce the excess demand.
 Some measures such as stricter
rent control may rather lead to
more excess demand.
 Bundesbank may continue to
intervene verbally.
Deutsche Bank
DB Research
Jochen Möbert
22
Agenda
Deutsche Bank
DB Research
1
Overvalued German housing market?
2
What are the domestic price drivers?
3
What are the external price drivers?
4
Details on German housing market
5
Bottom-line
Jochen Möbert
23
Bottom-line
Total German market driven by normalization
Credit expansion is lackluster. It seems that the market
is driven by portfolio reallocation of domestic investors
and demand of foreigners.
By and large, prices in regional markets seem in line
with economic strength
Risk of a bubble rather small unless
 behavioural change of creditors and debtors takes place
 affordability rapidly exceeds „100“
More market interventions are likely but excess
demand will not react to wishful thinking of politicians
Deutsche Bank
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Jochen Möbert
24
DB Articles on the German residential property market
Implications from the coalition agreement on the resi sector, Nov 2013, Industry Update
German house price increases in perspective, p. 11, Oct 2013, Focus Germany
Has the east German housing market turned the corner?, p. 19, Jul 2013, Focus
Germany
Germany: 2012 affordability indices of existing apartments in cities, p.22, Apr 2013,
Focus Germany
The German housing market: Risk of a bubble until 2020?, p.5, Sep 2012, Focus
Germany
Euro area property prices: Germany vs. the rest, July 2012, Global Economic
Perspectives
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Jochen Möbert
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