Finally, Germany won the World Cup.
The team didn’t get to keep the 18-carat gold trophy, but they were happier to take home a whopping $35 million prize money. Mind you, it is another $35 million on top of the economic powerhouse’s $3.7 trillion GDP.
So the richest are getting richer.
Advantages of being the odd one
Being the largest country in the EU, Germany has long been head and shoulders above the rest of the EU countries in terms of economy, much to the jealousy of the rest of the Europeans.
The Germans are just too industrious, uptight and thrifty on European standard. (If you’ve worked for a German boss you would agree. But honestly I like my ex-German boss – innovative, precise and to the point – the same reasons why I like driving German cars.)
Imagine all youngsters are having fun partying but one hardworking student still insists on burning the midnight oil. Everyone is spending lavishly enjoying life but one miser continues to save and invest. And this weird guy get rewarded handsomely for being the odd one.
However, there is at least one thing that the Germans don’t get it: Germany, being Europe’s biggest economy, has not had a single housing boom after World War II.
Why Germans don’t get it
The Germans may be crazy about soccer. But they are never obsessed with properties, unlike the Asians, Australians and Americans. In fact, they are culturally indifferent to home ownership and property investment. Although the unemployment rate of 5.2 percent is among the lowest in Europe, only 43 percent of Germans own their home.
In my book No B.S. Guide to Property Investment, I have mentioned how cultural differences and government housing policies can affect the home ownership rate in a country.
Recently, I read the article “Tell ’em they’re dreaming – Australian housing obsession is holding us back” in The Sydney Morning Herald with interest.
The article mentions that the lack of a housing boom in Germany may be the results of three factors:
1. Cultural disinterest in home ownership
There are progressive social housing programs in the country. Even though home prices are affordable, Germans are generally debt averse. They are far more interested in raising capital in more productive ways, such as investing in businesses.
2. Conservative banking policies
German banks are very conservative. They used to require 33 per cent of a mortgage payment upfront, with a 10 to 30-year fixed interest rate.
3. Highly-regulated rental market
German laws favor tenants over landlords. Regulations encourage and protect long-term tenants. A 40-year lease is not uncommon and the majority of rental contracts are indefinite. It is often not until they are in their 50s (and provided that they have the capital) that the Germans will buy a house that lasts for generations.
Why rising property prices is threatening the UK economy
The author questions whether the Australian dream of home ownership and property investment is doing any good to the country. According to the Australian Bureau of Statistics, with housing prices at 4.3 times the average annual income, Australia has one of the world’s highest house price-to-income ratio.
A research by the International Monetary Fund (IMF) shows that more than two-thirds of nearly 50 banking crises in recent decades are preceded by boom-bust patterns in housing prices.
In early June, IMF warned the UK government that accelerating house prices (especially in London) and low productivity are threatening the country’s economic recovery. Rising property prices are making UK households more vulnerable to income and interest rate shocks.
To prevent borrowers from overstretching their finances, IMF called for imposing limits on the number of low-deposit mortgages a bank can advance to borrowers, as well as changing the ‘Help to Buy 2’ mortgage guarantee scheme introduced by the government.
Under the Help to Buy scheme, 7,000 homes were bought which amounted to £1bn mortgages and £153 million government guarantees. The housing market is already showing the typical signs of a credit-led bubble.
What is the risk level in Singapore?
For Singapore, a country report released by IMF in November 2013 mentions that an estimated 5 to 10 percent of Singapore households are overleveraged on their property purchases, with total debt service payments over 60 percent of income. The figure could rise to 10 to 15 percent if mortgage rates were to increase by 3 percentage points.
IMF also points out that lower income households with less savings and those with multiple mortgages or longer loan tenors are most at risk.
In conclusion, let’s look at some statistics to check whether housing prices have been inflated to a level where homes have become out of reach of income earners in the country.
The above chart shows the house price to income ratio (price per square metre / GDP per capita) of different countries. It is the ratio of the cost of a typical upscale housing unit of 100 square metres, compared to the country’s GDP per capita.
Germany may be the World Cup champion. But it shows the lowest house price to income ratio well below that of UK, US and Singapore. Is it because the German fever only confines to football? Or our property obsession has gone too far?
Leave a Reply