German housing market: prices continue to rise, but slowdown in rate

Anything else would have been a real surprise: in the first quarter of 2017, prices on the housing market once again increased in Germany. This was shown in the vdp property price index for the German property market which was just published by the Association of German Pfandbrief Banks (vdp). Compared with the same quarter of the previous year, prices again rose significantly, by 5.6%. On closer inspection, there are some signs of a slowdown in the price development: The rather sluggish annual rate of change in prices conceals the fact that the price increase has appreciably decelerated on a quarter-to-quarter basis. In the first quarter of 2016, the cost of property increased by 1.7%, rising to 2.2% in the second quarter, but then declining to 1.5% in the third and 1.0% in the fourth quarter of the year – and by the first quarter of 2017, it had further dropped to just 0.8%. Is the housing market running out of steam? Or just taking a little breather ready for the next climb? According to our assessment, the factors that speak in favour of a continued significant price increase currently still carry more weight.

That is not to say there will be a return to 6% as we saw in 2016. First, interest rates continue to be extremely low; loans remain favourable and saving money is less appealing. Second, the situation on the labour market remains attractive, as reflected in climbing employment figures and salary increases. Third, in view of the considerable rises in rents, it is often more appealing to buy than rent, with the low cost of finance in many cases meaning that mortgage payments are in fact often lower than monthly rent would be for a comparable property. Finally, and a not unimportant aspect, Germans are mostly confident about the future, as is revealed in the high values for consumer confidence.

Combined, these factors are likely to ensure that the price momentum increases again over the course of the year. However, this does not mean that the danger of prices moving ever-further away from fundamentally justified levels is averted. This is particularly relevant because there have so far been no signs of a slowdown to the especially strong price buoyancy in the metropolitan regions, specifically in the seven major cities in Germany. However, the comparatively low level of indebtedness of private households and only moderate growth in mortgages continues to have a risk-reducing impact.

There are various grounds for expecting slower market momentum going forward. In the long term, the rather high price level is likely to hamper itself. It is also possible that buyers are more cautious as a result of the regular warnings about the risks of a property bubble. In addition, financing these high prices could cause even more difficulties for households, as they struggle to save the required equity to buy. A further argument is the increased supply of new builds as property construction has once again gained significant momentum. Last but not least, the ever-more excessive price expectations by sellers may have a dampening impact on the rate of market growth.

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