Fitch: Latest German House Price Rise Breaks from Regional Trend
March 11 () - (The following statement was released by the rating agency) FRANKFURT/LONDON, March 11 (Fitch) The rise in German house prices in 2011-2012 was less pronounced in the wealthiest parts of the country than in more moderately well-off areas, in a deviation from the long-term trend of house prices rising fastest in the wealthiest regions, Fitch Ratings says. This may suggest that demand for houses is tailing off where prices are highest, or is shifting from less affordable houses to more affordable apartments. We compared the most recent transaction prices from research and consulting firm BulwienGesa for 125 German cities with the four geographical categories we use to assess probable default rates and foreclosure proceeds. This showed that house prices in the wealthiest regions rose by 2% in 2011-2012. This was less than the 3% increase in house prices in the second- and third-wealthiest categories. But apartment price rises have continued to be most pronounced in the wealthiest category, up by 9.1% in 2012 from a year earlier - more than double the 4.4% average across all four categories. The four categories are based on a purchasing power index (PPI) that reflects individuals' disposable income by Landkreis (an administrative district between the federal states and municipalities). PPI categories group districts with comparable purchasing power regardless of which state they are in. The PPI has been a more reliable guide to differences in default rates and foreclosure proceeds than other less granular geographical divisions. We use it to help determine our residential mortgage loss assumptions by mapping borrowers onto one of the four PPI categories (A, B1, B2, and C) and adjusting our base case foreclosure frequency and quick sale adjustment assumptions accordingly. Our analysis shows that price moves in the residential property market also mirror the Landkreis-based PPI categorisation over the long term, with price increases for apartments and houses in economically strong areas outpacing those in weaker areas. Cumulative house price rises since 1990 in the wealthiest A category cities averaged 33.4%, higher than 31.6% in B1 and 21% in B2. For apartments, the difference was more pronounced, with average prices in A category cities rising by 42.2% - significantly higher than the 29.5% in the B1 and 16.2% in the B2 categories. The divergence from the long-term trend is not the first time that house prices in less wealthy areas have risen faster than those in wealthier areas. This also happened in the first half of the 1990s, but was a separate phenomenon driven by German reunification. The movement of Germans from east to west ultimately caused demand, and consequently prices, to fall in category C (the vast majority of C category regions are in the former East Germany). Cumulatively since 1990 apartments in the C category have lost on average 14.6% of their value. However, between 1992-1995, subsidy-driven investment in houses in the former East Germany, and a desire by East Germans to own their own homes, caused house prices to rise fastest in the C category, at 6.6% a year. This "eastern effect" was also seen in the apartment market.
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