Economy as a Whole: The Economic Upswing Will Accelerate Again in 2018

The German economy is progressing towards a boom. This is evident, in particular, from the overutilization of macroeconomic capacities, which is expected to increase considerably during the forecast period, while wage and price increases are set to intensify. After already making several upward adjustments to its forecast for GDP in 2017, the Kiel Institute for the World Economy (IfW) has lifted the GDP growth rate for 2018 to an expected 2.5% (previously 2.2%) due to the positive leading indicators. The ifo institute currently expects GDP growth to come in at 2.6%.

Rising investment, dynamic exports and strong government and private consumption will remain the key pillars propping up growth in 2018. Corporate investment in equipment, in particular, is expected to increase on the back of very favorable sales and earnings prospects, especially now that the negative factors resulting from the uncertain international environment would appear to be gradually petering out. The German economy is said to be benefiting from the considerably improved economic outlook for the euro area and countries oversees and, as a result, from brisk foreign demand for German industrial goods. This is also providing additional stimulus for the positive situation on the labor market, meaning that private consumption and the construction sector are also expected to continue to report a considerable rate of expansion, even if their contribution is expected to taper off slightly. The continuation of extremely positive financing conditions will support the continued upswing.

The more economic activity expands at a level in excess of the norm, the bigger the cyclical risks of a possible economic setback become. This is because there is a risk of resources being systematically mismanaged in boom phases. This increasingly creates production structures that are not marketable in the long run. Exaggerated financial trends in time of very expansive monetary policy – in particular distorted asset prices – exacerbate this process. The more pronounced the preceding boom, the more severe the recession involved in adjusting these undesirable developments can be. In addition to the global economic risks (such as the failure of the Brexit negotiations, an increasing financial stability risk associated with China or faster moves to hike key rates in the U.S.), cyclical developments can also give rise to risks – not least because many companies are reaching their capacity limits and are finding it increasingly difficult to recruit qualified staff. The delay associated with forming a government, however, means that there is still no information available on possible economic and fiscal policy impetus that could influence the outlook.

Looking ahead to 2019, the IfW and ifo still predict GDP growth of 2.2% and 2.1% respectively.

Housing Market: Prices for German Residential Properties Likely to Rise Further in 2018

The upward trend on the real estate market is entering its ninth year, meaning that it has reached a “mature” phase, according to experts at Helaba Landesbank Hessen-Thüringen. The overall framework will remain positive in 2018. Prices for German residential properties will continue to increase in 2018 as the drivers behind the upswing will remain largely unchanged: The German real estate market will be characterized by ongoing high demand. The population is growing, albeit at a lower rate than in the exceptional year of 2015. The marked trend towards domestic migration to the country’s major metropolitan areas is expected to continue. The supply of property available will grow at a moderate rate at best and, despite a slight increase in mortgage rates, the financing conditions will remain very favorable according to the Helaba experts. According to Scope Investor Services (Scope), the rental markets in the country’s major and fast-growing cities, in particular, are tense, with local signs of price overheating on the markets for condominiums. Scope expects both of these factors to remain unchanged for the time being. Although Scope expects the increase in rents and prices on the German residential real estate market to flatten out over the next five years, it does not predict any drastic drop in prices. Deutsche Bank Research expects to see the prices of apartments (resale) increase by 7.5% in 2018, with increases of 8.5% predicted for A cities. Rents are also expected to rise by 4.5% in 2018. Experts at empirica also expect the prices for residential properties in Germany to continue to rise in 2018, albeit at a slower rate than in previous years. They report that increased new construction activity will put a damper on any additional increases, with no prospects of any additional impetus on the horizon. The German Property Federation, Zentraler Immobilien Ausschuss (ZIA), is cautious in its outlook given the very high property prices already witnessed in many locations. In light of the robust conditions, the ZIA does not expect to see a turnaround, but predicts that prices will initially remain stable on average. According to Deutsche Bank Research, residential property ownership remains affordable, although nationwide affordability fell slightly in 2017 and is expected to drop slightly in 2018 as well. There are also pronounced regional differences as far as affordability is concerned.

The empirica bubble index surpassed the “zero threshold” for the first time in 13 years in the third quarter of 2017, as against the “bubble-free” reference year of 2004. As of the fourth quarter of 2017, the overall index is stagnating in growth regions and increasing slightly in shrinking regions. Rents and purchase prices in 247 out of 402 administrative districts and self-governing cities are no longer developing in tandem. According to empirica, too many apartments are being built in 17 districts. The bubble index indicates a medium to high risk for 199 districts. According to the experts at Aengevelt Research, the only risk of a price bubble relates to a very small number of individual submarkets that have already been characterized by above-average momentum for years now. Aengevelt Research believes that urbanization and the low interest rates are driving construction activity, that there are no indications of any speculative apartment construction activity and that no other signs of a bubble have materialized either. It believes that a lot will depend on how long the markets will benefit from interest rate levels. The question as to whether or not, and to what extent, a bubble will emerge will be answered at the latest when interest rate policy turns around. The majority of the 13 institutions and real estate researchers surveyed by the industry journal Immobilien Zeitung (IZ) expect the German real estate boom to continue until 2019, reported the IZ in September 2017. A few do not expect the current cycle to reach its peak until 2020. The survey participants do not expect to see any dramatic slump over the next few years unless the ECB takes drastic steps to increase interest rates.

According to the experts at Heleba, any housing policy measures taken by a new German federal government would presumably be delayed until well into the new year (2018), meaning that they would not bear fruit until the following year. The recently introduced new regulatory measure, the rent ceiling, is in place in more than 300 municipalities in twelve federal states. Its introduction in Mecklenburg-West Pomerania has been delayed and the rent ceiling is at risk of being axed in some federal states following the state parliamentary elections.