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RICS Global Real Estate Weekly

German house price momentum likely to reverse in H2

In September we downgraded our German house price outlook, believing the slower pace of economic growth would feed through to the labour market and eventually prices, thereby reinforcing the weaker price dynamic which already appeared to be in train. Whilst we still retain this view, the latest data indicates the previous softness in prices was more of a blip than a change in trend. Consequently, we have pushed back our expectation of the eventual inflection point in house price growth to H2 2012; in other words, we give the current upturn another six months or so.

The two main house price indices - Hypoport (monthly) and VdP (quarterly) – accelerated sharply in Q3. The headline Hypoport index increased by 2% over the quarter (or 8.2% annualised), whilst a simple average of the three published VdP indices (VdP don’t publish a headline index as such) increased by 0.9% over the quarter (or 3.8% annualised). Although it’s not clear exactly why price growth slowed in Q2 and rebounded in Q3, a large part of the explanation behind the general upturn in German house prices is the strengthening labour market. Indeed, having peaked at 10.8% in March 2005, the unemployment rate has since fallen more or less continuously, reaching 5.5% in October, the lowest at any point in the last 20 years.

Whether this improvement in the labour market continues is another matter. The labour market typically lags economic growth and leading survey indicators (the PMI, the IFO and the EC index) have fallen sharply over the last 12 months or so, signalling a likely slowdown and possible contraction in growth during 2012. Although further falls in unemployment may well take place in the near term, given the lead/lag relationship between growth and the labour market, the balance of risks surrounding the latter over the medium term is skewed to the upside. This in turn is likely to slow momentum in house prices, which we expect will begin in about 6 months time.

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