German residential prices still rising, demand gap slowly narrowing

REFIRE bumped into Scope Analysis’s Sonja Knorr at the recent EXPO REAL in Munich, coincidentally just as the Berlin-based ratings and analyst company Scope released its own study of the housing markets in Germany’s biggest 10 cities.

The study concludes that, despite a slight decline in growth rates, the average price of freehold apartment in Germany´s biggest cities rose by more than 8% in the first half of 2018, compared with the first six months of 2017. Such price increases are still significantly higher than inflation and the long-term trend, the study points out.

However, the Scope analysts see signs that the supply of new homes is coming more in line with demand. Construction activity is increasing along with prices. To compare with 2010, around 50,000 residential units were built in the 10 biggest cities in 2017 compared with only 20,000 in 2010. In 2017, the construction volumes in seven of the 10 largest cities were above the 25-year average, led by Frankfurt, Munich, Düsseldorf and Berlin.

There is also a discrepancy between housing permits, and units actually built. Around 150,000 apartments were approved in the 10 cities between 2010 and 2017 but have not yet been completed. The discrepancy is particularly wide in Berlin, Hamburg, Munich and Frankfurt.

Around two thirds of homes in the current building backlog are under construction. This means that around 100,000 apartments will be built in the next one to two years (excluding new approvals). The high completion rates should reduce upward pressure on rents and purchase prices.

There is also a gap between the number of new households and new homes. In the years 2010 to 2017, a large demand gap accumulated over the 10 cities, with the number of private households growing by 600,000 - while only 250.000 properties were constructed.

This means that after deducting the new properties from the building backlog, there is still a construction gap of substantially more than 200,000 dwellings. At the same time, the number of private households continues to grow. Scope expects an additional 100,000 private households in the top 10 cities by 2020.

Given the heavy overhang of demand, Scope sees no noticeable easing in rents and purchase prices over the coming two to three years, barring a totally unexpected external shock. Further rises in rental prices, will, however, be more closely aligned to the pace of inflation.

A factor which limits the increase of rents is the growing percentage of disposable household income that housing costs currently absorb. In Munich, Berlin and Frankfurt, rental costs account for well over 30% in 2018 – well ahead of the long-term average of around 25%.