Property prices in Germany – a cause for concern?

It is not exactly news that in recent years prices for houses and flats in Germany have rocketed. This has been driven by short supply, historically low interest rates, and good overall economic conditions. Since the price rise has hardly lost momentum of late, the central bank and the banking supervisory authority are certainly justified in keeping a close watch on things. In particular, the ECB’s still very expansionary monetary policy provides an ideal seedbed for price bubbles for capital goods.

Prices have become exaggerated particularly in the prospering business centres. Precisely there, the ongoing influx of new inhabitants contrasts with a short housing supply. In addition, investors, some of them from abroad, like to acquire multi-family dwellings in the prime German locations for their portfolios. The figures recently released by Verband deutscher Pfandbriefbanken (vdp) pointed to an initial, slight deceleration in the price momentum in these large cities. However, it is doubtful whether this trend will be sustained. Possibly, housing construction, which has now been ramped up, only temporarily braked the upward movement.

The vdp figures offered no signs of the national average easing off, though: They again reflected a dynamic rise in prices. And other price indices also suggest that the upturn persists. In this context, we hardly find solace in the fact that there are regions in Germany, where prices are not only low, but in fact actually sinking slightly. Essentially, the prices for houses and even more so for flats have become independent not only of rents but also of countless other fundamental factors.

Even if the growth in property loans is, according to the banking supervisory authority, not yet a cause for concern, the level of prices now reached most definitely is. Moreover, the measures resolved at the recent government housing summit will further fan the flames of demand for property and ensure that prices continue to head north. As a result, the danger of corrections at individual locations will increase further. These could be triggered not only by an economic slowdown, but also by rising interest rates or a clear expansion in supply. It is not so improbable in this context that all three factors kick in simultaneously.

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