Metropolitan areas in Germany are booming. The current real-estate cycle
started in 2009 and has led to significant price increases for residential property
in many cities. Prices for apartments have as much as doubled in some cities.
Strong population and employment growth and declining unemployment rates
are driving demand, and supply elasticity is low. New construction is slow to pick
up, and vacancy rates are declining. As a result, rent growth is accelerating.
Regulatory measures are unlikely to provide sufficient relief. House prices and
rents look set to rise markedly in 2018.
Data from a number of cities confirm that demand is high and supply insufficient.
In Munich, the vacancy rate is near zero. In Berlin, employment increased by
c. 4% in 2017. Frankfurt was already 40,000 residential units short in 2015 –
which suggests that 2017’s 15% yoy apartment price increase was not just
Brexit-related. Stuttgart’s location in a basin restricts construction activity,
contributing to the doubling of apartment prices during the current cycle.
Prices in Hamburg and Düsseldorf have risen strongly as well, even though
demand growth has been slower in these two cities than in other metropolitan
areas. The local markets might therefore be more sensitive to interest-rate
changes than their peers. Still, as our baseline scenario foresees only marginal
interest rate increases during 2018, Hamburg and Düsseldorf should experience
price and rent uptrends, too.
Overvaluations are rising, and the risk of a price bubble in the German housing
market is increasing. The price uptrend is likely to continue for several years, at
least in most major cities in Germany.