Berlin’s housing boom has lessons for London

March 25, 2014

By Olaf Storbeck

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Berlin is becoming a bit more Londonesque. While the buses in Germany’s capital are still yellow, not red, and the locals remain grumpy, the behaviour of housing prices has a British accent. According to property website ImmoWelt.de, asking prices for one-bedroom flats have risen 53 percent in three years. The Bundesbank has warned that property prices are roughly a quarter higher than fundamentals justify. But Berlin’s boom is much less likely to last than London’s.

The main difference is attitude. British policymakers see rising house prices as vote-winning. In Germany, big increases are considered socially disruptive and an electoral danger, because they lead to higher rents. Only 42 percent of Germans own their homes, well below the British two-thirds. German renters are protected from inordinate rent increases and are hard to evict.

The national bias against property speculation is reflected in law and business practices. British-style deposits of merely 5 or 10 percent of a property’s value are unheard of. German banks are legally required to restrict lending to 60-80 percent of value. Mortgage rates are fixed for up to 15 years and transaction costs of up to 10 percent of the purchase price discourage flipping.

Still, supply is reacting far more vigorously to rising demand in Berlin than in London. In Germany’s capital city, new building starts in 2013 equalled 0.7 percent of housing stock – a 40 percent higher ratio than in London. Berlin has the advantage of a large bank of underutilised land, but more important is the lack of the UK’s capital’s ultra-tight planning restrictions.

While the market response has been healthy, the usually stodgy German central bank has warned about excessive valuations. If these verbal interventions do not work, the central bank can turn to its new toolkit of macroprudential measures, including higher liquidity or equity buffers and lower risk limits for banks.

The Buba has left no doubt it is willing to use these instruments. That’s quite different from the Bank of England’s Mark Carney, who is talking down property risks. In the housing market, London could do with some German lessons.

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