Price pressure on the German housing market to continue


The German housing market in 2018

House and apartment prices in Germany have risen since the beginning of
2009, which means that 2018 is the tenth year in the current real-estate cycle.
Even though the cycle has already reached an impressive length, it is still
characterised by housing shortages and relatively inelastic supply. There is a
shortfall of c. 1 million residential units in Germany as a whole. Markets in
metropolitan areas (A cities) are particularly tight; there, prices have risen
c. 80% between 2009 and 2017.

Prices in B/C and D cities have increased c. 60% and 50%, respectively. The number of newly completed residential units is finally rising as well. It looks set to reach 305,000 for the first time ever in
2017, up from almost 280,000 in 2016 (the final figure will be released in June 2018). We expect it to increase further to 335,000 in 2018. However, assuming that at least 350,000 new residential units would be necessary (this is the government estimate; other research arrives at 400,000 or more), the gate between supply and demand should continue to widen.

The tight market situation has pushed house prices up even more strongly in 2017 than in the preceding years. According to bulwiengesa (which covers 126 cities), house prices rose c. 6 ½% and apartment prices more than 10% on average. As in the preceding years, the strongest price increases were registered in metropolitan areas and large cities.

However, many smaller cities also experienced significant prices rises, and in none of the 126 cities did prices decline. The price boom has an impact on rents, too. In 2017, rents for newly completed and existing homes rose 6% and more than 7%, respectively.

These are the strongest increases since 1993. Moreover, rent growth has accelerated
since 2009. The “rent brake” has turned out to be an obstacle to investment and
tends to harm tenants rather than protect them.

We expect price and rent growth to remain strong in 2018. The supply shortage
on the housing market and the excellent labour market will likely remain the
dominant price drivers. However, the high price level might squeeze out
potential buyers and thus dampen demand in 2018. In addition, higher capital
market rates might lead to a slight increase in mortgage rates, which could
reduce demand somewhat. We expect 5-10 year mortgage interest rates to rise
to 2% by the end of 2018 (from 1.7% currently).

As price growth looks set to remain strong and supply shortages will be a feature of the German market for many years to come, the risk of a bubble has increased markedly. German metropolitan areas will stay in the focus. This study analyses six major
residential markets: Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart.

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