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Here threatens the next real estate crash

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It is question of all questions: Do we have a real estate bubble in Germany or not? Anyone looking for an apartment in Berlin or Munich is likely to have a clear answer to irrationally high prices: Yes. Because this is not true.

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However, if rural areas in Germany are taken into consideration, a different picture emerges. On a broad average, prices also rise, but still in an economically reasonable framework.

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This is opinion of experts of rating agency Scope. They have examined residential property markets in some European countries and have found that a real estate bubble is still a long way from Germany.

nThe prices gallop rents of it n

In Norrn Europe, however, it looks different, especially in Sweden and Norway. Not only prices had risen almost uninterruptedly for several decades, but households' indebtedness also increased.

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In addition, purchase prices in Scandinavian countries galloped from rents. This is also case in some large cities in Germany. In Norway and Sweden, however, this development is particularly pronounced.

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The problem for real estate buyers in such an environment: you pay high prices for an apartment, but you need decades to re-load price over realizable rent. If n also financing on shaky feet stands and interest rates rise, it becomes tight.

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From point of view of scope analysts, re have been two real estate epochs in past years: stage before subprime crisis in 2007. And time after. "Between 2000 and 2007, purchase prices for residential property have actually increased by around 35 percent on average in 16 European countries concerned," says analyst Manfred Binsfeld from Scope Investor Services. "Since outbreak of financial crisis, however, y have fallen by an average of almost ten percent."

nIt takes a long time to settle debts n

The development was very different: "In years up to 2007 price level rose above all in Sourn Europe. Since 2008, however, prices for residential property have risen particularly in Nordic countries and in DACH countries (Germany, Austria, Switzerland) ".

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Two countries, however, would escape this scheme: Sweden and Norway. The prices have risen steadily both before and after crisis; since 2008, y have also risen significantly more than rents. "The ratio of prices to rents is at its highest in both countries since 1980." Situation in Spain and Ireland immediately before bursting of real estate bubbles.

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In Norway, debt burden of private households is now around 220 per cent of available household income. In Sweden it is about 180 percent. In both countries, this "debt-to-income ratio" has increased significantly since 2007. Real estate buyers need to spend ir debts re longer, on average about twice as long as in Germany.

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The long-term perspective is quite different. "The average real price increase of almost 20 percent since 2008 can only compensate for price decline of years 2000 to 2007," say scope analysts.

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The experts also point out that re have already been high prices in previous economic boom phases, without a crash. However, in big cities, re are "price exaggerations".

In London situation is dramatic

This is also confirmed by anor recent study by UBS. "The most important domestic markets in developed countries are still overvalued and risk of a price bubble has risen", experts from Swiss bank's asset management establish.

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Already since 2016 re is a risk of bubbles in Stockholm, Munich, Vancouver, Sydney, London, Amsterdam and Hong Kong. New to list of bubble candidates is Toronto. For UBS, most important bubble indicators are price-to-income ratio and, as for Scope, ratio of purchase prices and rents.

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Especially in London situation is described as dramatic. Adjusted for general increase in prices, house prices are already 45% higher than five years ago. Since Brexit decision, however, risk had declined somewhat as price rally took a break. In rest of Europe, however, situation continues to pick up, particularly in Paris, Amsterdam, Frankfurt and Munich.

nWeak price rally in smaller cities n

As far as price development in German cities is concerned, investors do not believe in a clear reassurance for time being. According to an online questionnaire among semiprofessional and institutional investors in Germany, 58 per cent of interviewees expect prices to rise at so-called A-locations in next two years.

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In smaller cities, on or hand, a weakening of price rally is expected. The survey was carried out on behalf of Engel & Völkers Investment Consulting.

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All in all, however, professional players have become somewhat more cautious. 38 per cent expect stagnating purchase prices on housing market, while 43 per cent of survey participants expect smaller price corrections for residential properties. One in five expects falling prices. So danger of bubbles in Germany could be over again before it really started.

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