Housing bubble

According to a study conducted by the German Central Bank, real estate prices in the country's seven largest cities are as much as 20 percent above the national average.

"This is explained by the fact that the economic perspectives are better than they were 10 years ago," said Hermann-Josef Hansen, director of the Economics and Growth Department of the German Central Bank. "The other reason: We have low interest rates, making it easier to purchase of real estate.

"In addition, and in light of the recent economic and financial crises, there is a tendency to invest capital in seemingly safer forms, for example real estate, which in turn pushes prices up because supply exceeds demand," Hansen explained.

Bubble in Germany?

In view of therapidly rising real estate costs, many observers are reminded of the developments, not long past, that led to the crises in the United States, Ireland and Spain. In those countries a housing boom accompanied the beginning of what many saw as an economic upturn.

In the end, however, the bubble burst and these three countries' economies went into a major downturn, sparking a tailspin for the global economy and one of the world's biggest economic crises.

It only makes sense, said Michael Voigtländer of the Cologne Institute of Economic Research (IW), that the central bank takes pains to closely monitor developments in Germany.

Voigtländer, however, said he saw little prospect of a real estate bubble developing in Germany as a number of circumstances are different than in the three nations.

"In Spain, for example, the loan volume for home purchases doubled or tripled within just a few years," he said. "In Germany, the loan volume is relatively constant."

Home buyers with little capital of their own were given big loans in Ireland, Spain and the United States and that was what triggered the crises, Voigtländer said. Buyers only had to provide 10 percent of the purchase price to get a loan and, of course, the consequences were understandably dramatic when the bubble burst - and with it the loans, he added.

The professor said he was convinced that in Germany that won't happen because a much higher personal investment is required to get a home loan. Furthermore, speculation usually occurs when investor expectations are overly optimistic about turning over real estate for a quick profit. That is when bubbles occur, but that is not happening in Germany, he said.

Supply and demand

Voigtländer has observed that many in the real estate market are using therecord low interest rates to pay off their loans faster, while others are investing a lot of money to protect themselves from a new crisis. At the same time, there is a noticeable increase in rents.

For urban dwellers with little money, such as pensioners, the unemployed or students, these are tough times, but it does show that the market is healthy, said Voigtländer, and Hansen from the German Central Bank agreed: "The price as an indicator that scarcity is functioning. Besides, the rising prices are concentrated in larger cities with their higher desirability."

Experts, including Klaus J. Beckmann, director of the German Institute for Urban Studies (DIFU) in Berlin, have called on especially popular cities and metropolitan areas to make more land available for housing. Beckmann also denied objections from critics that existing real estate soon will no longer be needed due to the shrinking population.

"This argument is only accurate on the surface because we are really experiencing the opposite development," he said. "Households are growing smaller and that is why we need more housing for the same number of inhabitants."

What's more, Germany's large, attractive cities are magnets for new residents and will shrink less, if at all. And while a stark reduction in population in Germany is perhaps 50 years away - and may not even occur at all if the demographics change - housing is needed now.

Limited problem

The conclusions of the central bank report are no cause for panic, according to Beckmann. It is correct, he noted, that prices have gone up 5 percent to 10 percent in recent years, but mostly in the major metropolitan areas of Cologne, Hamburg, Munich or Frankfurt. "In cities losing a lot of population, such as in the Ruhr industrial region or eastern Germany, the market is not tight and there are no investors because new properties won't get rented."

Voigtländer also said the central bank used a so-called "econometric computer model" in its study to illustrate developments on the real estate market. This mathematical model can cover rising prices and rents, he said, but has a weak point: the human factor.

"Peoples' preferences have changed - and they are prepared to pay more for inner city locations," Voigtländer said. "A factor driving that is the rising cost of mobility. People don't want a second car and don't want to commute as far."

Real estate as a stability factor

Fundamentally, it is a welcome development when as many individuals as possible buy property in urban areas. In addition to securing one's personal financial independence, home ownership helps commit people to that area, Beckmann said.

"You think twice before moving. That provides stability to neighborhoods and their inhabitants, reducing fluctuation," Beckmann added. "People who live in one place longer also get more involved [in local affairs]. That is why we are now looking more closely at how people with immigrant backgrounds are faring in terms of home ownership."

On the other hand, owning property works against the mobility that business and industry wish there was more of. All in all, experts agreed that in the years to come it will remain difficult to find affordable real estate in top urban locations. Those who can't afford it will have to move to the periphery.