German housing market: Prices are rising rapidly nationwide, high level in metropolises is slowing down

Prices on the German housing market continue to rise briskly. Since the end of 2017, residential property prices in Germany have risen by around 7% a year. The price increase in this order of magnitude also failed to materialise in mid-2019. The price index just published by the Association of German Pfandbrief Banks (vdp) showed a growth rate of 7.3% year-on-year at the end of the second quarter. This means that the expected slowdown in inflation has failed to materialise.

However, last year’s forecast was based on the turnaround in interest rates that was becoming apparent at the time. Instead, mortgage interest rates continued to fall – as a result of the slowdown in the European economy and the weak inflation trend. The average interest rate calculated by the Bundesbank for housing loans in new business fell to 1.57%, the lowest level to date. This means that the purchase of a residential property remains affordable despite the sharp rise in prices. While rising rents are making housing more expensive, declining interest rates are cushioning the rise in credit rates.

This is driving prices up, especially where they have risen less sharply so far. Outside the conurbations, real estate is still affordable thanks to moderate prices, low interest rates and construction child benefit. In expensive cities, on the other hand, high prices are increasingly overtaxing buyers. In the seven largest German cities, purchase prices have almost doubled within ten years. In the middle of the year, new apartments cost an average of between 4,900 euros per square meter in Cologne and 8,700 euros per square meter in Munich. Across Germany, prices have risen much more slowly, at just over 50%. If one excludes the disproportionate price increase of the cities, the moderate price dynamics outside the conurbations become clear.

In the metropolises, prospective buyers can – or will – no longer participate in the price spiral despite the low interest rates. This is shown by the price increase in the seven largest cities, which has slowed to around 4% a year. Flats in the family format can easily exceed the 1 million euro mark with ancillary costs. As a result, equity capital is increasingly becoming a bottleneck. In addition, residential construction, which is too low overall in Germany, has noticeably increased in these cities and the range of products on offer has expanded, especially in the higher-priced segment.

What will happen next on the housing market? Interest rates are likely to remain low for some time and will continue to support the real estate market. Price increases are likely to remain dynamic outside the conurbations in particular, while the pace in the cities could still slow down. From a risk perspective, this is favourable because overvaluations have formed primarily in the metropolises. The development of the market, however, makes it clear that, despite low interest rates, prices have reached the end of the scale regionally and should not surprise price declines. This could happen in particular if the economic slowdown impacts on private households. On the positive side, the real estate boom has not been accompanied by a noticeable increase in debt and the associated risks.

The rise in prices in the metropolises has fallen far behind the overall market
Prices for residential property in % compared to previous year

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