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Buying a home in Berlin is widely viewed as one of the safest investments a German, or any European, can make.
That is why some real-estate experts are worried the market could get overheated.
Home prices in Germany's largest cities are booming. Building permits and home ownership rates are climbing fast. And the percentage of foreigners snapping up second homes in Germany is on the rise.
In Berlin, Frankfurt, Munich and four other red-hot markets, prices surged an average of 10 percent during the first half of 2012, according to Deutsche Bank. German central Bundesbank data show increases of 9 percent in 2011 in the country's urban centers and 5 percent the year before. Things may not be as frothy as Las Vegas, Phoenix or Miami during the peak of the U.S. boom, but it is bordering on breathtaking in a country where home prices declined or stagnated from 2000 through 2009.
The rate at which home prices are rising in Germany is not sustainable in the long term, says Steffen Sebastian, the chairman of the University of Regensburg's Institute for Real Estate Finance. However, Sebastian adds, there won't be a repeat in Germany of the Spanish and Irish financial crises, where real estate markets disintegrated and economies were brought close to collapse after overextended homebuyers and banks were hit by the Great Recession of 2008.
"When we talk about bubbles of course the market in Germany cannot be compared with the U.S. market," he said. "Usually the other bubbles are driven by excessive use of leverage by borrowing money but in Germany borrowing was always quite heavily regulated and this is not going to change."
The recent fervor for German real estate is a consequence of the European debt crisis.
To stimulate economic growth, the European Central Bank has driven its benchmark rate to a record low of 0.75 percent and that is helping to drive down consumer borrowing costs across Europe. As mortgage rates fall in Germany, many are jumping at the opportunity to finance home purchases, pushing Germany's home ownership rate to 53 percent. That's up 10 percentage points from a decade ago, according to figures from LBS, Germany's largest mortgage lender.
Because of the ECB's interest rate policies, some Germans are fearful that borrowing and spending could rise too quickly, pushing up the prices of everyday goods to unhealthy levels. While inflation remains low in Germany — it's 2 percent compared to 2.2 percent across Europe — Germans have long feared the threat of rising prices ever since the hyper-inflation the country experienced in the 1920s.
As a result, Germans are still looking to protect the value of their savings from inflation. And they are turning to real estate as an investment. If inflation heats up, they can always raise the rent or sell their home at a higher price than they paid for it.
"Here in Germany that's a very emotional issue," said economist Michael Voigtlaender, head of the Real Estate Economics department of the Cologne Institute for Economic Research.
Even if the market does bubble, Germans are still paying large parts of the sale prices with their savings — rather than high-interest loans — so they stand to lose money they have, rather than money they don't have, which would cushion the blow of a bubble burst.
People across Europe are also snapping up German real estate. With their economies shrinking and banks paying very little interest on savings, Italians, Spaniards, French and others view Germany as a haven, and its housing market as an undervalued asset class.
Italians Andrea Bricconi and Claudia Mosca recently traveled to Berlin with one goal in mind: to buy a second home.
"It's our favorite city in Europe and we have some money to invest, so we decided to try it here," said Bricconi, 42, who lives in Austria and works as a marketing manager at a technology company. "It's much cheaper than fancy places like Paris or London."
"We like to think outside the box," said Mosca, 38. "And we like the idea that it's a vibrant city, especially with the interests that we have — music, cinema, dance — it's really the place to be in Europe now."
The couple couldn't find as good an investment opportunity in Italy and they say Germany's rising rents and home prices make it a safer place to get a return on their money.
Within a day, the married couple with two kids fell in love with an apartment in their €150,000 price range in Berlin's trendiest neighborhood, Prenzlauer Berg.
Bricconi and Mosca say the apartment in Berlin will not be just financial investment. They'll rent it as a holiday apartment, use it themselves when they are in the capital for the annual Berlinale film festival or just on vacation or let their kids — now 4 and 7 — use it if they go to university in Berlin. They can even see themselves ending up in the city full time.
Ziegert Bank and Real Estate Consulting, one of Berlin's largest real estate agents, says that more than one in six of its clients this year have been from outside Germany. Last year, it was roughly one in ten.
Another reason for the increasing interest in Germany's real estate is its economy, which has continued to grow — albeit at a slow rate — despite the financial crisis wracking the other 16 European Union countries that use the euro. The Berlin government currently expects 0.8 percent growth this year and 1 percent in 2013.
To help Italians, like Bricconi and Mosca, to find properties in Berlin, Ruth Stirati has set up a website, Case a Berlino. She says the renewed interest in German property from her clients coincided with the European financial problems. Clients were worried that a financial crisis at home would wipe out their savings, she said.
"They thought we are going to end like Argentina they are going to close our bank accounts, they are going to take our money, so my clients started panicking."
Adding to the property market's stability is the tradition for Germans to pay large parts of the sales price with savings, rather than high-interest loans.
German banks normally demand a deposit worth 20 percent of the property's value. A typical mortgage has its rate fixed for 10 years, after which time the homeowner agrees another rate for a new term. Thirty-year mortgages are not uncommon.
These factors mean that German homebuyers are less at risk of finding themselves unable to repay their mortgages in bad times. Fewer repossessions and foreclosures, in turn, help avoid sharp drops in housing prices.
Berlin is among Germany's most attractive real estate markets — especially for foreigners looking for mid-range investments. Average apartment prices are at about €2,000 per square meter as compared with Munich's €3,300. By comparison, apartments in Paris fetch between €6,000 and €12,000 a square meter, depending upon the neighborhood, and properties in some prime London neighborhoods cost as much as €17,775 a square meter.
The reason for the big price difference, says the University of Regensburg's Sebastian, is that other European countries' economies are focused on one or two cities — which draws people there and helps keep real estate prices up — Germany's is dispersed over many cities.
"Foreigners have come in waves to the German housing market, and they keep telling us the prices in Germany are undervalued, especially in Berlin, but they always misunderstand that Germany is not the same market as any other European country," he said.