German Property and the Credit Crunch

iGP Editorial* from 30th September 2008

The on-going crisis in the international financial markets is closely coupled with the US and UK housing market crashes. This raises the question of possible contagion with the German property market (see Die Welt 22/9/08). Since the Credit Crunch began in Aug’07, interest rates on Euro-denominated fixes are now closely back to where they were when the crisis began, although they were a good 80 basis points (0.8%) lower 6 months ago (e.g., see iGP#5, when a 5-year fix was as low as 4.39%). The Germany economy is visibly weaker with consequent downward pressure on German house prices. The German Institute for Town Planning estimates that total property sales in 2007 were 6.6% less than in 2005. According to the property fund Degi’s chief analyst average property values in West Germany are only 8% higher than in 1995, whilst in the East they’ve actually lost 11%. With Euro interest rates expected to fall over coming months as inflation subsides and the ECB loosens monetary policy, a freshly stimulated German economy should see property prices picking up again. It’s also worth pointing out that German property’s particular price stability over the past few years means German banks have less to fear in lending money against an asset that could potentially lose 30% of its value within a short period. This means the supply of German mortgages is still abundant and at reasonable rates (unlike the situation in the US and UK) and there’s also healthy competition between the various banks for mortgage custom.


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