The recent house price jolt in some German cities reportedly coincides with strong buying interest by foreigners (see FT weekend edition from August 3). This trend is not so different from other global cities, such as London where three quarters of buyers are reportedly from abroad (dito). Are wealthy foreign buyers causing German cities to become unaffordable to German dwellers? Here is a view that could liven up your Stammtisch debate.
First, compared to other countries, home ownership in Germany is exceptionally low and tenant regulations strong, limiting the impact of house price inflation on many German dwellers. Recent research has shown that low ownership rates are associated with lower unemployment, possibly as tenants are more mobile than home owners. This suggests that rental demand could be elastic enough to contain rent-to-income ratios, limiting the pass through of housing inflation to rents. On the flipside, buy-to-let investors will have to put up with below-cost rental yields as house prices rise. Second, if there is a bubble (and excessively low rental yields are one of its indicators), the investors affected by an eventual house price crash would largely be foreign. As foreign buyers oftentimes pay cash without the leverage of a mortgage, the repercussions of a crash on German households and banks would be less daunting than in, say, Ireland or Spain. Third, foreign buyers are more used to off plan purchases of new developments, which helps developers and could do good to German’s dated housing stock. As sad as it sounds, architectural advances are often sighted in cities with property bubbles. Foreign investors may thus bring some architectural joy to the dull look of many German cities.
With this in mind, what are appropriate policy responses to deal with the flipside of the property bubble? First, tighten prudential policies for mortgage origination. Global liquidity conditions—including an ECB policy rate that is too low for Germany—have set off a search for yield that tempts many Germans to participate in the house price rally. That is a bad idea, and debt-to-income and loan-to-value limits could ensure that those who accept this gamble maintain sufficient buffers. Second, regulation of rent increases—if designed well—could protect the large cohort of tenants who else lose amid house price inflation. While price controls are distorting and become ineffective over time, a temporary ceiling on rent increases—as often in place elsewhere—could buffer the effect of house price swings on rents. Third, a real estate transaction tax—akin to the financial transaction tax—could slow the transaction flow and discourage flipping, while revenues could be put aside as reserve or be used to help those suffering most from house price inflation, such as families with increasing housing needs.
