Why Frankfurt may have the biggest real estate bubble in the world

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Residents of parts of Germany, such as Frankfurt, Munich and Stuttgart, are used to high prices for renting and buying a home.

But a new ranking shows just how overheated housing markets are in two popular German cities.

And Frankfurt – the banking capital of Germany – took first place in the UBS Global Real Estate Bubble Index 2021, ahead of Toronto, Hong Kong, Munich, Paris, Amsterdam and Zurich.

Real estate bubbles occur when house prices skyrocket due to an imbalance between supply and demand, and are still driven by speculative purchases.

READ ALSO: How did it become so expensive to live in Munich?

Source: UBS

The city of Hesse has the highest “real estate bubble risk” for the period from mid-2020 to mid-2021 with 2.16 points.

“Frankfurt, Toronto and Hong Kong lead this year’s UBS Global Real Estate Bubble Index, the three cities with the most pronounced bubble risk ratings in housing markets among those analyzed. UBS said in its study.

Every year, the big Swiss bank UBS investigates the highest risks of a real estate bubble. According to this index, a value of 1.5 points indicates a risk of a bubble. UBS defines a real estate bubble as a strong and persistent deviation of the price level from fundamentals such as income, economic growth and population migration.

Munich took first place in 2020 with 2.35 points. He was followed by Frankfurt with 2.26 points.

READ ALSO: COMPARE: Cities in Germany with Fastest Rising Rents

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In Frankfurt, real house prices – that is, corrected for inflation – have increased by 10% per year since 2016, according to the UBS study. In no other major city in the world is the real estate market as overheated as in the main metropolis. Rents have also increased by around three percent per year.

UBS said the Frankurt score “is in bubble risk territory, which is the result of extremely strong price growth.”

“Currently, its price growth is still at the unsustainable level of 6% per year, although it has fallen below the national average.”

This is due to several factors, according to experts.

“Strong economic and employment growth laid the foundation for this market momentum,” UBS said. “The population has grown by over 12% over the past 10 years.

“Although construction activity has accelerated in recent years, it has not kept up with growing demand. As a result, rents have increased by almost three percent per year, making Frankfurt the city with the third highest rental inflation among all those analyzed.

“But extremely low mortgage rates and lax financing conditions were the real engine of the real estate frenzy. With the increase in rents, Frankfurt has become a hotspot for speculative rental investments.

Researchers said builders focused on luxury apartments “which has contributed to price inflation.”

The skyline of Frankfurt.
The skyline of Frankfurt. Photo: picture alliance / dpa | Arne dedert

To curb speculation, a tax on second homes (Zweitwohnungssteuer) was introduced in 2019. People who own a second home in Frankfurt are required to pay a tax which amounts to 10 percent of the city’s annual net cold rent per year.

But things can change as demand decreases.

“Frankfurt has become increasingly unaffordable; the price-to-average income ratio has doubled in 10 years, ”UBS said. “Along with the increase in remote work opportunities, the city’s population growth has stopped and people are moving to more spacious locations in the suburbs. “

The real estate and consultancy firm Immoconcept also believes that there is a danger of a real estate bubble in Frankfurt.

In a recent study, they found that purchase prices and rents have increased for the tenth year in a row.

In the first half of the year alone, purchase prices increased by 17%.

Real estate consultant Colliers also reported record prices for apartments in Frankfurt. In new construction, the average condo now costs € 8,000 per square meter, and in older buildings it is around € 6,000 per square meter. The annual increase in purchase prices has been around 12% since 2016, Colliers found.

The danger of a real estate bubble is that speculators will pour money into the market, making places unaffordable. It can change neighborhoods forever and fuel gentrification. The bubble bursts when demand drops.

READ ALSO: Why Rent Prices Are Starting To Fall In Big German Cities

What is causing the boom in Munich?

Munich also got a high score on the list, although they have slipped in the rankings compared to last year. The Bavarian capital has seen a lot of job creation and new residents over the past 10 years, which has boosted the demand for housing.

“On average, real prices increased by more than eight percent per year between 2010 and 2019,” UBS said in its study.

This is bad news for people trying to find affordable housing. “Given the low financing costs, speculative investment remains an important pillar of demand. Overall, the city has become a victim of its own success, ”UBS said.

Munich has one of the highest price-to-rent ratios of any city reviewed by housing experts.

But the decline in affordable housing and the pandemic’s need for more space have shifted population growth to the suburbs, UBS said.

“As a result, in recent quarters, price growth has stagnated. And for the first time since 2012, rents have even corrected slightly.


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