On the international stage prices for residential property have risen sharply, not only in absolute terms but also in relation to disposable per capita income. Following the stock market bubble, experts are already warning of a property bubble. Here in Germany, however, there is no sign of an exaggerated rise in prices. Indeed, in many parts of Germany prices have been flat since the second half of the 1990s, not least as a consequence of surplus capacity immediately after reunification. However, construction activity has declined sharply in recent years, suggesting that a fall in vacancy ratios is on the cards. Moreover, the favorable relationship between purchasing price and rent is attracting foreign investors with an eye on the long term. Unlike in some foreign markets, there are no signs of a price bubble in Germany. Rather, the outlook for prices is perking up.
Compared with other European countries, purchasing real estate in Germany is associated with substantial hurdles. For one thing, buyers need to reckon with an additional 10 % in ancillary costs on top of the purchase price. For another, Germans like to have lots of advice when selecting a property, and when putting together a financing package.
Residential property extremely stable in terms of both value and returns
Nonetheless, the economists at Allianz see substantial potential for German financial services providers in the residential property market. Against the backdrop of the low home-ownership ratio in Germany and demographic change, two groups of the population are among the potential buyers: families with children and those in the second half of their professional life.
Furthermore, coming years are expected to see a wave of inheritances which will trigger considerable demand for loans to finance renovation and modernization investment. In addition, growing demands on employee mobility will boost transactions on the property market. And, last but not least, the volume of residential loans in Germany currently stands at 50 % of GDP compared with more than 60 % in the UK and the USA. Catching up with these two countries could lift the home-ownership ration from 43 % now to 54 % by 2020.
As the Working Paper shows, the residential property market offers favorable investment and business options for both the private investor as well as for the financial sector. For private property owners, home-ownership offers a secure investment for retirement. Although the value of a house is not going to soar, it does offer solid advantages over other forms of investment. The stability of returns as well as the savings made on rental payments guarantee good coverage in old age. In addition, investors can benefit from the moderate price level of German real estate.
Summary: Shares are subject to fluctuations. Real estate on the other hand is a safe investment for retirement. Residential property thus provides interesting prospects as an instrument for retirement provision and for the financial sector.
David F. Milleker
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