German economy is recovering and worker productivity is falling, according to the latest RICS Global Real Estate report published today (8 January 2009).

German house price data for December is due from Hypoport next week. The November headline index was down by 2.2% y/y but prices are currently rising by 2.7% on an annualised basis (three month on three month).

The stability of German house prices since the financial crises is due, in part, to the following factors.

First, mortgage lending has been stable, both ahead of and following the global financial crisis (it is currently flat on year ago levels). Second, there was no building boom. Residential investment as a share of GDP currently stands at 5.5% and has been below its long run average (6.5% since 1991) since Q1 2001. Finally, Government emergency measures to support the economy i.e. the short time workers scheme, have limited the rise in unemployment, which is now falling (currently 7.5% down from its June peak of 7.7%). The scheme involves full time workers agreeing to work part time in return for not being made redundant with the government compensating the shortfall in their earnings.

Joshua Miller, RICS Economist commented:

“The 2010 outlook for the German housing market is brighter and this is partly due to the recent extension of the short time workers scheme until the end of 2010 (it was previously due to expire at the end of 2009). It is also partly due to improving labour market and macro economic fundamentals.”

Indeed, the December Market EU productivity PMI showed that German output per head increased at the fastest pace since February 2006, due to the recovery in the manufacturing sector (the manufacturing PMI reached 52.4).

“The rebound in the economy is also coinciding with a fall in unemployment expectations, which in December slipped to their lowest level since December 2008 according to the European Commission. Renewed policy support, improving fundamentals and confidence are likely to be supportive for the housing market.”