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German housing market probably won't escape unscathed
Economic Special
by Alexander Koch
18.05.09
The German housing market did not participate in the recent global price boom. Even though it is does not have to contend with the bursting of a bubble, near-term home price data has also been pointing south recently for Germany. Is there now the threat of a similarly strong correction as in other countries?
German home prices have increased much less strongly than household incomes in the past decade. Nevertheless, home affordability has remained relatively subdued to date. In an international comparison, absolute home prices in Germany were rather high for a long period in the past.
Our model estimates point - based on household incomes and construction prices - to a perceptible but not drastic undervaluation of residential properties of close to 5%. In fact, home prices therefore even have upside potential overall.
Despite persistently low new construction activity, there is, however, unlikely to be a general increase in price pressure, not least because of the negative demographic development. The competitive rental market and the relatively elastic supply of homes are also of help here.
Furthermore, in the short term there is a prevailing negative cyclical factor: the labor market. In the last pronounced recessions, home prices regularly fell substantially in the wake of the labor market downswing, by at least 5% in real terms in a period of 5 years.
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Bank Austria