Housing Market: Rents and Prices Expected to Increase in Germany Again

The German residential real estate market is currently 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 owner-occupied apartments 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. 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. The state building societies (Landesbausparkassen) expect a price increase of between 3% and 5% on the German residential real estate market by the end of the year. Deutsche Bank Research expects to see the prices of apartments (resale) increase by 6.6% in 2017 and 7.5% in 2018, with increases of 7.5% (2017) and 8.5% (2018) predicted for A cities. Rents are expected to increase by 4.0% in 2017 and by 4.5% in 2018. According to Deutsche Bank Research, residential property ownership remains affordable. Nevertheless, there are pronounced regional differences and residential property looks set to become less affordable.

The empirica bubble index increased again in the second quarter of 2017. Rents and purchase prices in 240 out of 402 administrative districts and independent cities are no longer developing in tandem, with the bubble index indicating a medium to high risk for 168 districts. In a study commissioned by gif, Gesellschaft für immobilienwirtschaftliche Forschung e. V., and other institutions, the Cologne Institute for Economic Research and IRE|BS University of Regensburg reached the conclusion that a speculative bubble remains unlikely, arguing that the price development was explicable and that financing behavior remained 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 majority of the 13 institutions/real estate researchers surveyed by the industry journal Immobilien Zeitung (IZ) expect the German real estate boom to continue until 2019, with a few, according to IZ, not expecting 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.

Due to the significant increase in rents in many places, there were calls for a 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. While its introduction in Mecklenburg-West Pomerania has been delayed, the rent ceiling is already at risk of being axed in some federal states following the state parliamentary elections.