Assetz® News - The counter-crunch option

The counter-crunch option

3rd June 2008 |

In these days of the credit crunch a number of markets have been singled out as not being badly affected by the crisis. While some markets are still enjoying their emerging status and France has benefited from its banks' low exposure to the US sub-prime market, the German market is something altogether different.

While a number of markets around the western world have soared in recent years, Germany's has stagnated, with house prices, if they have moved at all, falling.

The explanation for this lies in the early 1990s, Speigel Online has stated. In an article reproduced in Newsweek, it explained that following the reunification of the country a law was passed allowing investors in property in the former east to write off the investment costs against their taxable income for a decade. The result of this was a high level of investment which created a property bubble, one that did not match up with demand.

Consequently, there was a property bubble which burst, leaving the German property market in the doldrums, where, not helped by factors such as high unemployment and a sluggish economy, it stayed through this decade. Meanwhile, those who had invested heavily in property in the 1990s had seen their fingers burned and investors were thus reluctant to turn to the sector.

Yet, the article added, this has left a situation where property in the country is very cheap and buy-to-let is now growing again. The question is whether this now marks out Germany as a safe and worthwhile place to invest.

According to Denis Madden, managing director of the German Property Centre, which supports UK and Irish investors in Germany, the answer is definitely yes. Mr Madden said the last couple of years have seen a major surge in overseas investment which has pushed up prices, although even in Germany the credit crunch has caused a slight correcting influence.

However, he said, this did not mean a slump was on the way in the manner of some other countries, stating: "Right across the spectrum we've been seeing huge interest in the last two years and now what we've seen is a general slowdown in that level of investment, but not the price falls that have been registered in other markets."

He added: "Whereas you've seen a fall-off in other markets, Germany has, relative to other markets, been as safe as houses. Very, very strong fundamentals and the price growth only occurred in the last two years and was very much a correction from historically very low prices and very high yields."

These fundamentals, Mr Madden noted, included factors such as falling unemployment and Germany recording its first post-reunification budget surplus last year.

For those looking to find price growth, it seems the cities are the place to go, as Jurgen Michael Schick, vice-president of Germany's Real Estate Association, told Speigel Online. He explained that locations such as Hamburg, Nuremburg and Munich have outperformed the national average (The Royal Institution of Chartered Surveyors' European Housing Review 2008 noted that Munich prices were up six per cent in the first half of 2007) while places such as the former east continue to be in the doldrums.

While these cities are growing, Mr Schick said: "We expect price rises of about three to four percent a year, which in the past were the monthly rises in the UK." This might seem a cautionary tale for those looking to make a quick return. But on the other hand, it may be attractive to longer-term investors, as steady growth rather than possible boom-and-bust may make German houses safer still.