German residential prices keep rising, but rents stabilising

Two key trends seem to be evident on the German residential market – at least in the larger cities – at the moment. The rate of increase in rents appears to have slowed in the third quarter, or rents have actually decreased for the first time in more than a year, with the exception of Berlin among Germany larger cities.  And secondly, the rise in purchase prices for German residential property continued upwards in September, indicating price growth actually accelerating.

According to the Europace house price index EPX, which measures the prices actually paid for property on the basis of the Europace platform’s huge reach across the financing spectrum, the overall index for residential accommodation prices rose 1.22% in September over the previous month led by a surge in the price of apartments. The sub-index for condominiums increased by 2.34% in the month, making it the third consecutive increase and twice as strong as in August. The sub-indices for new and existing homes also achieve new highs in September, increasing by 0.90% and 0.35% respectively. Price growth in both segments is accelerating, Europace said.

REFIRE has been tracking the EPX index almost since its inception in August 2005. For the first time since records began, the index, which is produced by Berlin's Hypoport group, achieved a double-digit price increase within 12 months - for the apartment sector at 11.19%. The purchase prices of existing homes rose over the prior 12 months by 7.59%, and costs for new homes were 5.23% higher in September.

"The rise in prices of residential properties in Germany is not based solely on increased demand but also to increased construction costs," said Europace CEO Thilo Wiegand. "Cost drivers include increased energy requirements, material costs and delays in approval processes and construction times."

In contrast to the rise in purchase prices, the IMX Index from top property portal ImmobilienScout24 showed offered rents in the third quarter of this year falling slightly, with the exception of Berlin. The IMX is based on prices quoted in the millions of ads placed on the ImmobilienScout24 website.

Rents have fallen in Munich (0.6%), Hamburg (1.8%), Cologne (0.2%) and Frankfurt am Main (0.4%). “The huge price jumps of the previous months are no longer representative of what’s happening, as such unrealistic levels no longer match the reality by most people in their normal working lives”, said Michael Kiefer, chief economist at ImmobilienScout24. However, rents are also unlikely to fall substantially, he believes, given the surplus of demand in most larger cities. On the contrary, they could resume their upward trend, albeit less steeply, he thinks.

Günter Vornholz, professor for real estate economics at the EBZ Business School in Bochum, views current developments as unsurprising. “The large rise in rents led to builders, project developers and housing associations seeing sufficient incentive to begin building again in 2011 and 2012. This increased supply and acts as a brake on rent increases. According to the Federal Statistics Office, the number of new building permits for apartments in multi-family homes rose in 2011 by 27.5% to 85,304 units, and rose by a further 13% in 2012 to 96,177 units.

Vornholz added that additional downward pressure on prices was coming from families moving to the outer suburbs in search of more living space. In his view, this “voting with your feet” was a textbook example of how the matching of supply and demand in the housing sector automatically leads in the medium term to a stabilisation of rents – a clear dig at the current proposals by politicians to introduce a “rent brake” to protect tenants, and which is widely opposed by the real estate industry.

In Berlin, Chancellor Angela Merkel is engaged in a series of protracted negotiations with her likely coalition partners the SPD, which knows from experience it needs to extract hard compromises from Merkel in advance of any new coalition agreement if it is to avoid the same loss of voter popularity it suffered after the last ‘grand coalition’ which it shared with Merkel, in the government before last. Last week the SPD named just such price controls on rents imposable by landlords as among its ten ‘must have’ conditions for entering government with Merkel.

Germany’s Bundesbank garnered widespread headlines in the German press recently when it warned in its October monthly report that the hefty price rises in urban areas of nearly 25% in some quarters “could give rise to fears of a broad-based property boom”. The report suggests that residential prices in the cities are about 10% higher than they should be based on demographic and economic factors in its model; in the largest cities they are up to 20% overvalued based on the model. Not only that, says the report, but there are clear signs that the overvaluation is spreading into the urban hinterlands. 

Nonetheless, the Bundesbank too cautioned against trying to combat the rise in housing prices by imposing rent controls. "The Bundesbank is opposed to restricting the amount by which rents can be increased," it said. "Further robust growth in the construction of multiple-family dwellings can only be expected for as long as investors continue to see enough yield potential in the buy-to-let market." Despite its warnings about housing price inflation, the Bundesbank said it was "very unlikely" that the German price developments would result in macroeconomic risks or dangers to financial stability.