German housing market: Prices rise somewhat more slowly despite falling interest rates

Prices on the housing market continued to rise in the third quarter of 2019. This is shown by the price index recently published by the Association of German Pfandbrief Banks. However, the rise in prices for owner-occupied homes and apartment buildings acquired by investors has subsided, especially in Germany’s seven largest cities. In 2017, residential property prices in the high-priced cities still rose at double-digit annual growth rates. Prices in these cities are now rising at less than 4 percent a year. Price dynamics are even more pronounced outside these conurbations. Between July and September, purchase prices for owner-occupied homes and apartment blocks rose by around 6 percent nationwide. For a long time, the metropolises raised real estate prices, while the „province“ slowed down – for over a year now it has been the other way round.

There are various reasons for the slowdown in inflation. However, this is not due to the financing conditions. On the contrary, the mortgage rates published by the Bundesbank fell to their previous low of just under 1.3 percent in the third quarter. In 2018, construction loans were still 60 basis points more expensive on average. Accordingly, there was demand for private real estate financing, the volume of which, at 70 billion euros, was around 30 percent above the ten-year average in the third quarter. This at least contradicts the argument that real estate loans more often fail due to a lack of equity due to high real estate prices.

In the expensive metropolises, however, the situation is different. With average prices for new apartments ranging from EUR 5,000 to almost EUR 9,000 per square metre, the lack of equity capital, in addition to the already high prices, is a possible reason for the declining price dynamics. In the case of multi-family houses, on the other hand, the tighter rental regulations are likely to have led to a reluctance to buy. So far, the initially low rental yields have been aggravated by the prospect of subsequently raising them through rent increases. However, rent caps and the tightening of the rent brake make this strategy more difficult. The extended construction of new buildings is also likely to act as a price brake. With around 290,000 completed apartments, demand is still well below the estimated 400,000 units, but the gap has narrowed in recent years. New construction has grown particularly strongly in the seven largest cities, where building permits have come close to annual demand in some cases. In addition, the influx into these cities has slowed as a result of high prices and rents.

From a risk perspective, the slower rise in prices in the metropolises is particularly welcome. As a result, the existing overvaluations here are now barely increasing. By contrast, purchase prices outside these conurbations have risen much less sharply, so that the more pronounced price dynamics there are less significant from a risk perspective. In the future, however, the affordability of real estate as a whole will suffer from rising prices, so that price dynamics will presumably weaken somewhat in the coming year. However, low interest rates and the good employment situation will probably continue to ensure lively demand for owner-occupied homes. But investors will also remain loyal to the housing market for lack of investment alternatives alone.


The rise in prices has slowed overall, but especially in the metropolises.
Prices for residential real estate compared with previous year in %

Source: vdp Verband deutscher Pfandbriefbanken


Falling interest rates drive up demand for mortgages

Source: Bundesbank

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