German housing market: another dynamic price increase in Q2 2018 but big cities lose momentum

Reports on the German housing market have meanwhile become almost boring, with prices rising at a fast pace on the back of good economic conditions, low interest rates and a shortage of supply. The second quarter of 2018 is nothing out of the ordinary either. The property price index just released by the Association of German Pfandbrief Banks (vdp) posted another sharp rise. Prices for residential properties rose by 7.5 percent year-on-year, while multi-family homes sought by investors were up by almost 10% annually. The increase has been even greater in the seven largest German cities. Residential property prices here climbed by nine percent while multi-family homes were another two percentage points higher.

Very interesting developments can also be gleaned from the vdp figures. Whereas nationwide housing price growth maintained its rapid tempo, price momentum eased in the top-7 cities – Berlin, Dusseldorf, Frankfurt, Hamburg, Cologne, Munich and Stuttgart. Multi-family house prices in the large cities increased sporadically by 15 percent and residential properties by up to 12 percent annually. The braking effect becomes even more obvious if the quarter-on-quarter price change is used rather than the more sluggish annual rate. This shows that the price growth of owner-occupied and multi-family homes in the top-7 cities had slowed to the nationwide level.

While this might be a short-term dip, it would be quite plausible for price momentum to remain high nationwide with the large cities reporting a more moderate increase. Despite lower interest rates, affordability here has deteriorated because of the sharp rise already in purchase prices –more than double compared to 2010. The high deposit required for the expensive apartments represents another barrier to entering the housing market. The boost in housing construction has also increased supply. However, prices increased at a much slower pace in many other cities and in rural areas especially. It can often be cheaper to finance rather than to rent in these areas. The strong demand is also supported by the fact that a wait-and-see approach probably offers no advantages because prices and interest rates (where applicable) will also tend to be higher in the future.

How will Germany’s property market progress? Provided there is no fundamental change in the framework conditions comprising high employment, rising income and low interest rates, price growth will probably remain strong. Demand will also be supported in the second half-year by the ‘Baukindergeld’, a government help-to-buy scheme for owner-occupied homes, which as things stand can be applied for as of September 2018. This subsidy will be used especially by buyers in regions where purchase prices are lower, as the EUR 12,000 per child could account for a significant proportion of the mortgage. Apartments large enough for families often cost more than half a million euros in the large cities, so that the Baukindergeld will represent a welcome windfall effect at most.

Following a long period of stagnation and the consequences of a sharp hike, prices are now fluctuating between catch-up effect and overvaluation. The latter applies in particular to sought-after cities with a high influx of people. But this is not yet a proper price bubble, especially since the volume of mortgages is still growing at a moderate pace. Nonetheless, price corrections can potentially still occur, triggered for example by rising interest rates or an economic headwind.


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