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23 01 2020

Market Insiders Anticipate Further Price Growth for Residential Real Estate

Germany in the 2010s was defined by booming real estate markets. Indeed, the price hikes continued right through the final year of the decade: During the third quarter of 2019, for instance, condominiums in the “Big Seven” metropolises sold for 9.0 percent more than during the prior-year period. This is the upshot of figures released by the Institute for Urban, Regional and Housing Research in Hamburg (GEWOS)1 and by the Federal Statistical Office (Destatis)2.

As Carolin Wandzik, Managing Director of GEWOS, summed up when presenting the figures, there is no sign of a slowing dynamic in the Class A cities. Compared to the first two quarters, when prices rose by 8.6 percent each, the price growth has actually accelerated further. In Germany’s other major cities, condominium prices went up by an average of 5.8 percent, according to the statistics office.

Housing Policy Could Further Slow Building Activity

Although the current cycle has been going on for quite some time, and although it has often been speculated that it might end soon or that at least the price growth would slow down, there is no sign of either on the housing market itself. The Helaba state bank, for one, does not assume that real estate prices will soften any time soon. The bank argues that a recession is not in sight, and that the increase in condominium prices is to some extent offset by the low level of interest rates, so that residential accommodation continues to be affordable in many German cities.3 Moreover, the incoming migration in metro areas is driving demand, as the Helaba real estate report suggests.4

Neither is any relief to be expected from the supply side. Around 300,000 flats were completed in 2019, a figure that obviously falls short of the German government’s stated annual goal of 375,000 flats on average. At the same time, the backlog of planning permissions is enormous; in 2018, nearly 700,000 flats already approved were not completed. The concern on the part of Helaba is that the building activity would be further muted by the “ever more restrictive housing policy.” As long as supply continues to run low, a price drop is hard to imagine.

Market Running Dry for Investors

Empirica board member Reiner Braun told the Frankfurter Allgemeine Zeitung daily that even if housing construction met its target, it would only slow the price growth rather than reliably prevent it once the interest rates go back up.5 Braun expects prices to keep rising in the suburbs of swarm cities as well.

So, the one factor that causes many market players to expect that less money will be spent on German residential and commercial real estate in 2020 is simply the shortfall in supply. Many large-scale investors who stocked up on real estate in recent years see little reason to put their assets back on the market when there are such few investment alternatives.6