German housing market: prices continue to rise in Q1 2018 at a fast pace

How much longer can this go on? The already strong upward trend for prices in the housing market actually picked up speed in the first quarter. According to the price index just released by Verband deutscher Pfandbriefbanken, the prices for owner-occupied properties (detached houses and owner-occupied flats) rose 1.6 percent nationwide in Q1 2018. The increase for complete multi-family blocks in such demand among investors came to 2.6 percent. In other words, prices gained 7.4 percent and 10.9 percent respectively on the prior-year quarter. Both figures are record highs in the history of the index series, which reach back to 2003: The price hike for the year for owner-occupied houses topped seven percent for the first time. For multi-family blocks the annual growth rate entered double digits for the first time. In the seven largest German cities, prices rose even faster. On an annualised basis, the price of owner-occupied housing there climbed on average by 10.4 percent, with the figure reaching 13.7 percent for multi-family blocks. Unlike the nationwide prices, the gain here was slightly down on the maximum seen in 2017.

The key price drivers: a short supply of housing and ongoing sound economic conditions with employment racing from one record to the next. Added to which are low interest rates that ensure favourable financing terms and a continued lack of investment opportunities for investors otherwise. However, interest rates have now edged a little north from their low hitherto, meaning that affordability is being squeezed between the rocks of rising prices and slightly higher interest rates.

So why is the successive deterioration in affordability not muffling the price rise? One possible explanation is buyers’ concern that the entry conditions into the property market may become tangibly worse. For if prices continue to climb and interest rates rise, not only will it become more expensive to buy property, but it may actually become impossible to do so. In the metropolises, by contrast, a dampening effect now seems to have started, as alongside the very high prices there, low and further falling returns on rents are also depressing things.

With the sharp price rise in the first quarter, property prices have again moved somewhat further from their fundamental basis, as they are rising faster than rents and incomes. As regards the nationwide price level for owner-occupied housing, the price rise of not quite 40 percent since 2010 does not spell a bubble. And the nationwide price increase for multi-family blocks of just short of 60 percent is also not undue. For the top seven cities, where the price surge has been 80 percent for owner-occupied housing and 110 percent for multi-family blocks this is no longer the case, however. Yet there is no sign of a reason for a major price correction here, either. That said, the risk is growing, as alongside the high prices there are two more factors straining things, namely interest rates that are starting to edge up and economic prospects that are dimmer.

 

 

 

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