BERLIN, April 24 (Reuters) - Unlike his parents who rented their whole life, Berlin resident Sebastian lives in his own apartment and is considering buying a second property in the German capital as an investment to top up his pension one day.
For decades a nation largely of tenants and prudent savers, growing numbers of Germans are buying property, not just to own their homes but also in search of investment returns they can no longer earn on their bank savings.
This shift to a more U.S. or British approach to property is being encouraged by the European Central Bank's cheap money policies and rising rents, especially in German cities.
A growing urban population and unexpectedly high immigration are pushing up a housing market where construction rates had been low for years.
"I've a private pension scheme, but despite diligent saving, it hardly yields anything due to the ultra-low interest rates," said Sebastian, a 38-year old management consultant, who asked not to be named in full because he does not want clients to know about his personal financial affairs.
While Sebastian bought his first apartment six years ago to escape rising rents, he now wants to buy a second property as a private retirement fund.
In the years that followed the fall of the Berlin Wall, property prices in the city were significantly lower than in the likes of London or Paris. But the German capital is no longer a cheap place to live.
"The problem now is: it's really difficult to find an apartment in Berlin which is not totally overpriced," said Sebastian.
Figures from the European Union's statistics agency show 52.5 percent of Germans lived in their own home in 2014, well below the EU average of around 70 percent. But this is sharply up from 2006 when, according to separate data from the German Federal Statistics Office, the level was about 42 percent.
Strong demand for homes is fuelling a construction boom that is helping to support the German economy while exporters, who traditionally drive growth, struggle due to a slowdown in some of their major markets such as China.
In the last three months of 2015, construction was one of the biggest growth contributors while net trade was a drag. In the first two months of 2016, building investment further increased, raising hopes of a strong first quarter.
However, concerns are growing that a property bubble may be inflating at least in some cities. If it bursts one day - a scenario that could be created by rising interest rates, higher unemployment and changing demographics - owners and lenders alike could be hurt, posing a risk to medium-term growth.
A shortage of affordable housing is also forcing poorer families out of cities, widening the social gap in one of Europe's richest societies and raising tensions after a record one million migrants arrived last year alone.
BENEFITING FROM THE BOOM
So far, Sebastian has benefited from the boom. After studying in London and Boston where rent ate up a large part of his scholarships, he returned to buy a 100 square metre (1,100 square foot) apartment in Berlin's then up-and-coming Wedding district. For the 120,000 euro ($135,000) purchase, he borrowed 100,000 euros in 2010 on an interest rate of 3.8 percent.
"From today's point of view, this was a bargain," Sebastian said, adding that he could now probably sell the flat for twice the price, if not even more.
Many others have followed suit. Comparing prices on property websites has become a hobby for many Germans and real estate is a frequent topic of conversation at parties.
"The demand for owner-occupied flats in Berlin has been booming since 2010 and it has increased in the last two years," said Christian von Gottberg, a real estate agent at the Engel and Voelkers.
First-time buyers tell Gottberg how landlords are raising rents for a third time within a couple of years. "So whoever can afford it, and has the financial means to meet the bank requirements for the deposit, opts for their own apartment."
Rates of owner-occupancy remain modest by EU standards. "But for Germany, it's a radical change. And it's the ECB's record-low interest rates that are driving this," said Steffen Sebastian, head of real estate finance department at the University of Regensburg.
STRICT STANDARDS
Construction firms and real estate groups are naturally benefiting from the boom.
For instance, shares in Patrizia Immobilien, which is building 4,000 new flats on top of the 80,000 homes it already owns, rose about 35 percent in the past 12 months.
Hochtief, which focuses on public construction projects but also builds homes, has risen nearly 60 percent over the same period.
Perhaps the biggest beneficiaries are thousands of small- and medium-sized firms that dominate residential building, and the banks which hand out ever more loans.
According to the Bundesbank, the overall volume of real estate loans rose by 3.5 percent, the strongest annual rate in more than a decade, to a record 1.23 trillion euros in 2015.
This has led Bundesbank board member Andreas Dombret to warn of an overheating property market, at least in some cities, and urge banks to stick to their credit criteria which have so far been strict.
While some blame speculation for part of the price rises, others point out that housing remains in short supply due to a lack of construction in 2001-2009 when borrowing costs were much higher and tax incentives were scaled back.
Also, German home buyers still finance nearly a third of their property purchases with cash. The average debt ratio has risen only slightly from 70.3 percent in 2010 to 71.7 percent in 2015, according to Interhyp, Germany's biggest mortgage distributor.
"Talk about a nationwide housing bubble is surely exaggerated," Interhyp CEO Michiel Goris said.
The structure of loans has even become more conservative as clients are locking in record-low borrowing costs of below two percent for a period of up to 15 years, he added.
For Sebastian, German banks are still too strict. Since he opened his own consultancy firm with no steady income on paper, lenders have hesitated to give him a second property loan. "That's absurd. But due to standardised processes, the banks are not flexible, no matter how cheap the ECB is making money." ($1 = 0.8909 euros)
