German resi market under pressure

Rising rents in German cities, coupled with an overbuild in rural areas could put the brakes on the residential market, the Cologne Institute for Economic Research (IW) warned this month.

In recent years, there has been a surge in the construction of micro apartments in Germany, which are often priced at the upper end of the market. High prices - coupled with a glut of such apartments in some cities – is likely to lead to a price correction, said IW professor Michael Voigtländer.

‘This is a problem in Frankfurt, where almost one-and-a-half time the required number of micro apartements will be created, whereas in Düsseldorf only 10% of the demand is covered,’ he said.

Many of the micro apartments are earmarked for students, who simply can’t afford them, Voigtländer said. The situation is likely to be exacerbated by student numbers in the future, which are expected to fall. ‘What is to happen with the apartments then is questionable,’ he added.

Rural areas are facing a different, albeit related problem: too many single-family homes are built in many regions: ‘Most rural areas are oversupplied, so house and land prices will fall in the future,’ Voigtländer said.

Only municipalities which are directly adjacent to large cities still need single-family houses, according to the IW study.

These risks could lead to market corrections both in rural and urban areas, said Voigtländer. ‘In the big cities, the rent brake (Mietpreisbremse) also ensures uncertainty among investors. Although there is no evidence showing that it works, almost all parties want to keep it’, he said. After the Bundestag election next month, it could be tightened, he added. As such, existing calculations that are based on rising rents may need to be revised downwards, which would put pressure on prices.

Between 2011 and 2015, around 20% of homes built in German rural districts were surplus to demand, according to the IW. Single-home properties were overbuilt to twice the degree. In Emsland, for example, more than 1,000 apartments built in the period were surplus to requirements.

As a result, it is estimated that prices for apartments will fall by more than 25% in a third of rural areas by 2030, according the DIW Berlin. The price of single family home and duplexes is expected to fall by more than 25% in around 100 of Germany’s 402 rural districts and municipalities. Areas that are expected to be particularly badly hit include Brandenburg, Sachsen, Sachsen-Anhalt and Mecklenburg-Vorpommern, according to the DIW.

Younger people are deserting rural communities in droves, preferring to migrate to bigger cities in search of better job opportunities. The oversupply in Germany’s rural communities comes in stark contrast to the dire undersupply facing its seven biggest cities, where in the same period only 32% of the homes needed were actually built. The German population is forecast to shrink by 2.1 million between 2015 and 2030, which is also exacerbating the two-speed housing market.