As domestic and foreign investors seek refuge in German bricks and mortar, fears of a real estate bubble grow – By Harald Freiberger

Sometimes, Jürgen Haug can only shake his head: “Many of my customers are currently preoccupied with just one subject: How do I get my hands on a house quickly?” explains the investment advisor from Ismaning near Munich.

Recently, he had yet another such customer. The man had fallen in love with an apartment with a roof-deck and a price tag of €5,400 per square meter. The apartment would have cost him €320,000. He had €50,000 of his own to put towards the purchase and an annual income of €70,000. He wanted to begin by renting out the apartment before moving in himself. “I ran some calculations with the customer and luckily managed to talk him out of it,” says Haug. The risk was just too big and the financing too restricted. If even just one month’s rent was missed, the bank might have put him under pressure to sell. The customer’s losses would have been in the tens of thousands. Haug suggested investment funds.

Scenes like this are currently being played out thousands of times over in the offices of German investment advisors and real estate agents: the battle for houses in Germany. The finance crisis has shown that money is no longer safe in the bank, investors think. The debt crisis has shown that state securities are no longer a safe bet. The result is a scramble for real value: gold and real estate.

“There are strong indications that we’re at the beginning of a real estate bubble here in Germany,” says Steffen Sebastian, Professor of Real Estate Finance at the University of Regensburg. Interest rates are being kept artificially low by central banks, investors don’t have access to worthwhile forms of investment and, together with these factors, there is anxiety about inflation. Sebastian sees great danger in all this: “The interested parties are not generally speculators. They’re private investors whose anxiety about their money causes them to misjudge the risks and believe that they have to invest everything in real estate.” They have perhaps a maximum of €100,000 and borrow €300,000. But the result of this is an enormous concentration of risk and high indebtedness. “That’s the opposite of security which dictates that risk should be widely spread and debt kept to a minimum,” says the Professor.

The situation is strained to the extent that the German central bank recently warned of the possibility that rents will not be able to keep up with the rapid increase in the price of real estate. That being the case, many mortgage arrangements would collapse. The Bundesbank registered a rise of 5.5 percent in house prices last year in large cities. The price for newly built houses in Bavaria increased by 16 percent, according to one bank study.

The situation is being further aggravated by the deluge of money from the European Central Bank (ECB), which has made one trillion euros available to banks at low interest rates over a three-year period, with the aim of easing tension in the financial markets. A portion of this money is likely to be used by banks to offer even cheaper real estate financing thus enticing private investors to put even more cash into property investments. Jörg Asmussen, a member of the ECB Executive Board, says that the situation in the real estate market should be “closely monitored”: plain talk for a central banker.

Estate agents report that many potential purchasers are turning up to view houses, which three years ago would have stimulated little interest. They often feel under pressure to confirm the purchase within a few minutes for fear that the desired real estate will otherwise be snapped up by someone else. “Very many people forget that a piece of real estate is a very risky investment,” says Professor Sebastian. “Because you can see and touch a house it offers the illusion that you can judge its value better than an intangible security.”

Foreign investors have also discovered the German real estate market. These include wealthy private investors from crisis-hit countries like Greece, Portugal, Spain or Italy. They aim to secure their wealth by investing in property in northern Europe. Large investment companies from Asia, North American or Scandinavia who lack investment opportunities in their own regions have also entered the market. They also see how cheap real estate in large German cities is compared with prices in Paris or London.

In Berlin foreigners are estimated to have bought around a third of real estate sold in 2011. Even in blighted inner-city areas such as the Neukölln district, property is now changing hands for double the market value. On Chamissoplatz square in the Kreuzberg district, with its well-maintained Wilhelminian-era houses, prices have doubled in recent years.

Hamburg is a popular port of call for Scandinavians. Real estate buyers there think nothing of shelling out €900,000 for a 170 square meter apartment at the Eppendorfer Baum subway station – €5,300 per square meter. And in the affluent Hohenfelde neighborhood, prices have increased by almost 50 percent in the last year alone. “There’s a danger here of unleashing a price bubble,” says Sebastian. Investors expect prices to boom even further in the next five years and are concerned to have a stake – that’s the stuff that bubbles are made of.

The investment advisor Haug believes that prices in and around Munich have been over-heating for some time. “I now only advise customers who really don’t want to be talked out of it to buy a house.” Twelve years ago the price per square meter in the Munich area was €3,500; in the meantime, it’s risen to around €5,000. The risk that the gravy train might soon come to a halt is high. “Prices are not increasing to the extent that the hype always suggests,” says Haug. A 100 square meter apartment in a Munich suburb for €500,000 – “a large sum of money like that would have got you an entire house in a posh neighborhood not so long ago.”