German housing market: Things heating up further on the back of significant price rises last year

At the moment, there is a never-ending stream of customers lining up at the doors of brokers, notaries and mortgage lenders. In actual fact, even more contracts could be signed if the number of properties on the market was not so small. Nevertheless, profits are on the rise, as fees and interest rate margins increase with rising purchase prices and loan amounts. These service providers will therefore, along with the rest of the real estate industry, be happy to hear that purchase prices are set to continue rising rapidly. Data recently published by The Association of German Pfandbrief Banks (vdp) on the German housing market is confirmation of this upward trend in prices. After two slightly weaker quarters (in comparison with 2016), prices in Q3 and Q4 2017 rose again more strongly. On average in 2017, the prices for owner-occupied properties (houses and flats) rose by 5.8% year on year. This is only slightly below the strong growth in prices (+6.0%) seen in 2016. While the price increases for owner-occupied flats were actually slightly up on 2016 (+6.8% vs. +6.5%), there was a marginal decline of 0.3 percentage points (to +5.5%) in the pace of growth for house prices.

The robust economic environment with record highs in terms of the number of people in employment and simultaneously low interest rates has seen purchase prices rise across many parts of the country. As before, however, the rises were particularly significant in major conurbations. According to the vdp figures, prices in the largest seven cities in Germany (Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart) rose at double the pace of the market as a whole. Property in these cities increased in price by an average of 11.5%, while in 2016 the equivalent figure did not even reach 10%. The reasons for these much more marked price rises are the significant population growth in the cities, the insufficient number of new construction projects specifically in these major conurbations on account of a lack of building space and the broader base of potential buyers. After all, in addition to domestic occupants and investors, these cities are the main targets of purchase interest from abroad.

Yet why have the price increases for houses and flats been ramped up again? After all, the prices in many cities are already fairly high. In the seven largest cities, owner-occupied properties have risen in price by an average of 70% since 2010, while on the market as a whole prices have risen by around half this amount across the same timeframe. It may well therefore be expected that the high prices could both increasingly put off buyers as well as result in failed financing on account of insufficient capital. Moreover, interest rates are no longer falling. In actual fact, funding has become more expensive, having risen by a few basis points since 2016. This has resulted in current burdens for buyers rising on account of a combination of the loan amounts required being higher and interest rates having slightly increased. However, how does this bring about upward price momentum? One factor could be the increased macroeconomic growth. In addition, increasing reports on an imminent change in interest rates may be having an effect: interested buyers are more likely to make purchases today at slightly lower prices and interest rates than they are to adopt a “wait and see” strategy, because it could be the case that their dream property is no longer affordable at a later date.

Renewed strong growth in property prices increases both the likelihood of overvaluations as well as the risk of price corrections. An unexpectedly strong rise in interest rates would likely be the trigger for such an event. In contrast, should interest rates rise, as expected, on a more gradual basis, the pace of price increases should slowly tail off for the reasons stated previously, which would therefore see valuation ratios settle down again. However, should the planned measures outlined by the potential new Grand Coalition in Germany, including “Baukindergeld” (a financial support scheme for families with young children to facilitate the acquisition or construction of a home), extraordinary write-downs and billions of euros for social housing construction projects, come to fruition, the desired cooling of the property market could be delayed.


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