Residential Real Estate Market: Germany Expected to See High Demand and Rent Increases Continue

The German residential real estate market is experiencing the most prolonged upswing seen in post-war history, according to experts from Scope Investor Services (Scope). The rental markets are tense in the country’s major and fast-growing cities, with local signs of price overheating on the markets for condominiums as well. Scope expects the tense situation and the exaggerated trends to continue for the time being. The overall macroeconomic situation is robust and the number of private households will increase further, fueling demand on the residential real estate market. According to Scope, the market is only moving towards a better balance between supply and demand very slowly, with construction activity gradually starting to pick up. Savills believes that the overall conditions on the German residential real estate market remain positive from an investor’s perspective. Given the high demand, rents will continue to rise this year unless the state steps in with clear regulatory measures to halt rent development. According to Savills, Germany’s major metropolitan areas still offer positive long-term growth prospects. Investors should look not only at the areas’ core cities, but also at their surrounding areas. ImmobilienScout24 believes that, in addition to rising quoted rents, the prices of existing and newly built apartments are likely to continue to rise looking at Germany on average. The state building societies (Landesbausparkassen) expect to see prices to have risen by between 3 % and 5 % on the German residential real estate market by the end of the year. According to DB Research, residential property ownership remains affordable. There are, however, pronounced differences from region to region.

According to information released by the Cologne Institute for Economic Research as part of a study commissioned by gif – Gesellschaft für immobilienwirtschaftliche Forschung e.V. and others, the sharp increase in real estate prices for all forms of investment since 2010 is of fundamental significance. The prices of residential real estate in major cities stand out in particular. Nevertheless, the Cologne Institute still believes that a speculative bubble is unlikely, arguing that the price development can be explained and that financing behavior remains virtually unchanged. It does, however, point out that interest rates, economic developments and demand are currently providing extremely positive overall conditions, and that market corrections are likely to be made to one or several of these factors over the next few years. The empirica bubble index did not increase any further in the first quarter of 2017 and there is no conventional nationwide price bubble at the moment. Rents and purchase prices in 230 out of 402 administrative districts and self-governing cities are no longer developing in tandem, with the bubble index indicating a medium to high risk for 155 districts.

Due to the significant increase in rents in many places, there are calls for greater regulation of the residential property market in the run-up to the German Bundestag elections. The most significant new regulatory measure from a property owner’s perspective, the rent ceiling, is in place in more than 300 municipalities in twelve federal states. In Mecklenburg-West Pomerania, the federal state government has been tasked with introducing the regulations as soon as possible. Following the state parliamentary elections in North Rhine-Westphalia and Schleswig-Holstein, the rent ceiling could well be axed based on the coalition agreements.