The Real Estate Sector and Its Relation to the Financial Sector

Abstract

In Germany, unlike many other countries, a real estate bubble did not develop in the 2000s. The stability of the German real estate market is the result of a combination of specific institutional features. Firstly, government intervention in the real estate sector led to a diversified supply of housing in all housing segments. Although the government has reduced its active role in the sector in recent decades, the established structures continue to prevail. There was a sufficient supply of rental dwellings, so that households only decided to purchase their own homes when it appeared beneficial. Secondly, a relatively conservative system of real estate financing has contributed to the stable development of the real estate market. Those factors appear to have reinforced each other and to be beneficial for the system as a whole. The most important financial investors in the real estate market are open or closed real state funds. These have, until now, been relatively unattractive for international investors due to a lack of transparency and the way they are taxed. While this has meant that less capital has been available, it may have sheltered the German market from foreign capital inflows that could have led to Germany also developing a real estate bubble. Since the Great Recession there have been signs that a real estate bubble could develop in Germany in the future due to very low interest rates, a distrust of monetary forms of wealth and the limited supply of appropriate property in bigger cities.