German Property Bubble Inflates in Cities

Germany, the Eurozone's economic powerhouse has seen a massive increase in Germans from rural settings and foreign investors flocking to the cities for property bargains.

The financial capital of Frankfurt; Munich with its famous beer gardens and proximity to the Alps and Stuttgart, the home of Mercedes and Porsche are becoming increasingly attractive as places to live and work.

Property prices have responded to the huge increase in demand and have begun to spiral, driven largely by foreign investors searching for attractive rental yields.

Patrick Armstrong from Plurimi Global Macro Fund said, "Near zero interest rates in the Eurozone make sense for the region but not for Germany. The economy has been relatively strong and the interest rate policy is disjointed from economic reality".

"With 10-year Bund yields at 1%, free money will have to flow towards property at some point. Rental yields of 4% to 5% are attractive with current interest rates and German property is the least expensive per square meter in Western Europe."

According to research, the most expensive properties in Germany are found in Munich (an average €4,800m2). Berlin is relatively cheap at an average cost of €2,930m2, while Frankfurt properties will set you back an average €3,400m2.

Compare that with the average square meter price of £8,900 (€11,120) in London's Westminster and Germany is a definite bargain.

However, it is Germany's capital that is showing the highest growth in values. Prices of apartments in the trendiest part of Berlin have seen a 40% increase since 2007, while they have grown by an equally impressive 25% to 30% in popular cities like Munich, Hamburg and Frankfurt.

Germany's Bundesbank has recently voiced concern over the health of Germany's property market saying that “there is an increasing risk of a housing bubble in Germany”. It also warned that certain cities showed prices that were overvalued by up to 25%.

The stability of Germany's economy provides attractive support to foreign investors in its property market. In terms of the rental market, Germans famously favours tenancy over home-ownership and the combination of a stable employment market together with rising incomes ensures consistent demand for centrally located rental properties.