During the current real-estate cycle, i.e., from 2009 to 2017, house prices
have risen 80% in large metropolitan areas (A cities) and c. 60% in B and C
cities. In 2017, the number of newly completed residential units looks likely
to have risen to more than 300,000 for the first time in the current cycle; in
2018, it might climb to 335,000.

However, assuming that there is demand for at least 350,000 new apartments, the gap between supply and demand should continue to widen in both years. As demand remains high, upward price pressure will continue. This suggests that prices and rents will rise
further in all major cities. Overvaluations are rising, and the risk of a price
bubble on the German housing market is increasing. The price uptrend is
likely to continue for several years to come, at least in most major cities in

— In Munich, apartment prices more than doubled between 2009 and 2017.
During the same time, the population rose from 1.36 million to 1.53 million.
There is a shortage of several tens of thousands of residential units. The
vacancy rate is near zero, and current and planned future building activities
will not suffice. The supply shortages should drive house prices and rents
upwards in the coming years.

— In Berlin, house and apartment prices were up c. 10% yoy in 2017.
Unemployment rates have dropped to record lows, and employment growth
is strong. New construction activity is sluggish. The gap between permits
and completions remains large. The price and rent increase looks set to
continue at the same pace in 2018.

— In Hamburg, prices for existing apartments have risen more than 70% since
2009. Compared to other metropolitan areas, rent growth is below the
average. It is dampened by comparatively strong construction activity and a
stable population.

This suggests that the low interest rate level is probably
the main reason behind the uptrend in apartment and house prices.
Hamburg’s property market might therefore be more sensitive to interest
rate changes than that of other metropolitan areas. Since our baseline
scenario for 2018 foresees only small increases in mortgage rates, house
and apartment prices in Hamburg will probably continue to rise strongly this

— The market in Düsseldorf might be as rate-sensitive as its Hamburg
counterpart. Since 2009, the population has grown “only” 5%. And other
demand drivers were less dynamic than in other German cities, too. Price
and rent growth have tended to be (below the) average. Nevertheless,
prices and rents look set to rise again in 2018.

Stuttgarts population is slow to grow. Since 2009, it has risen only about
6%. The city’s location in a basin restricts construction activity in the long
term. Still, its excellent economic structure and dynamic labour market are
driving prices upwards. Prices for existing apartments have risen more than
100% since 2009 and 14% in 2017 alone. Rents for re-let apartments have
risen 63% since 2009 and c. 12% in 2017. As the labour market boom is
likely to continue, demand and, consequently, prices and rents will probably
rise further in the coming years.


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