German Home Prices Rose Most in Decade on Cheap Finance

German home prices rose by the most in at least 10 years in 2013 as low interest rates made it cheaper to finance purchases and prompted investors to switch from bond markets to real estate. The gains slowed in the fourth quarter.

Prices for houses, apartments and residential buildings climbed 4 percent in 2013 from a year earlier, according to an index published today by the VDP Association of German Pfandbrief Banks. That’s the biggest gain since at least 2003, when VDP began compiling data. Prices rose 3.4 percent in the last three months of the year, the smallest increase in five quarters.

Germany’s housing rally is being driven by low borrowing costs and a shortage in big cities such as Berlin and Frankfurt, where construction lags behind demand. The Bundesbank said today that home prices in cities are about 25 percent overvalued, and the German government has proposed new laws to curb price and rent increases in an already tightly regulated market.

“Demand for residential properties remains high,” Jens Tolckmitt, VDP’s general manager, said in the statement. “Large cities and university towns continue to be at the center of attention.”

Owner-occupied condominiums gained 4.9 percent and apartment buildings rose 4.7 percent in 2013, driven in part by a 4.2 percent rise in rents paid on new leases, according to the VDP data. Single family-homes had the slowest gain, at 2.6 percent.

Slowing Gains

Gains in most residential segments were strongest in the first three quarters of the year, according to VDP. In the fourth quarter, prices for owner-occupied apartments and houses fell 0.4 percent from the previous three months, the first quarterly decline since the start of 2010.

A slowdown in apartment building price gains may be the result of dropping rents for new leases in the fourth quarter, Tolckmitt said in the statement.

“Residential prices rose faster than economic and demographic fundamentals would suggest” in 2013, the Bundesbank said in its monthly bulletin today. “This was particularly so for the urban property market, which was measured as being overvalued by between 10 percent and 20 percent. Prices in cities diverged upward by an estimated 25 percent.”

VDP’s office-price index rose 5.9 percent, less than the year-earlier increase of 6.1 percent. Office prices are being pushed higher by institutions seeking a profitable investment amid low yields in fixed-income markets.

VDP collects price data from mortgage contracts signed across Germany by its 38 member banks, which include Deutsche Bank AG, Commerzbank AG, Banco Santander SA (SAN) and ING Groep NV. (INGA) By contrast, most German real estate indexes focus on the country’s biggest cities.

To contact the reporter on this story: Dalia Fahmy in Berlin at dfahmy1@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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