High urban prices pushing up property in big city hinterlands

The latest monthly report from the Bundesbank deals with housing prices outside the biggest German cities, and concludes that while price rises have slowed in the big cities, they have been gathering pace in urban hinterlands.

High prices in the cities have led families to search further out for a place to live, and this is now noticeably pushing up prices.

We’ve grown used to the Bundesbank warning that residential housing prices in the Big 7 cities are about 15% to 30% overvalued, compared to their long-term value, which in turn is pushing up rents – although not as strongly in 2018 as in the years before. Rents on new lease contracts on average were about 3.75% higher last year than a year previously, when they hit 7.25%. Even in the biggest cities new contracts were 4% more expensive in 2018, down from the 9.25% increase new tenants had to stump up in 2017 over the previous year.

And the ‘experts’ made no bones about what’s likely to happen through 2019, when the so-called ‘Wise Men’ presented their official ‘state of the real estate nation’ analysis to the government, on the occasion of the annual Quo Vadis real estate conference in Berlin earlier this month.

The price pressure will intensify in 2019 as a result of politicians setting the wrong incentives to reduce the gap between housing supply and demand, they said in no uncertain terms. In essence: Not enough new building, Baukindergeld or special write-off possibilities for buyers were actually driving prices up, along with the misguided Mietpreisbremse, or rental cap, that was happening the opposite effect than intended.

Dr. Andreas Mattner, president of the leading real estate industry lobby ZIA, warned that “New construction in our country is being completely neglected” as he handed the 364-page official statement to Marco Wanderwitz, parliamentary secretary of state to Building and Construction Minister Horst Seehofer.

What’s needed urgently is the raising of linear depreciation possibilities, further tax incentives to support energy improvement requirement, the lowering of the and transfer tax (stamp duty) and the speeding-up of planning and permit regulatory issues.

Underlining why rents and prices would continue to rise through 2019, Carolin Wandzik, one of the five ‘Wise Men’ and head of the GEWOS Institute, pointed to the continues influx of foreigners into the biggest cities, more than compensating for a slower rate of internal German migration.

Of the biggest cities, the highest prices rises last year were in Berlin (up 15.2%), followed by Frankfurt am Main (up 13.2%). Average prices in the big cities now range from €6,390 per sqm in Munich to €3,240 per sqm in Cologne.

The so-called ‘swarm cities’ are all likely to show further price increase this year – and that includes wealthy cities outside the A-cities like Ingolstadt and Freiburg, but also Mainz, Regensburg, Darmstadt, Heidelber and Wiesbaden. Cities like Potsdam and Jena in eastern Germany would also be included.

Harald Simons, CEO of research institute Empirica, and a man who has often stuck his neck out saying German residential prices are headed for a big fall, pointed to the large number of German cities where vacancy rates of under 3.0% to 3.5% act as price drivers for higher rents. This is the case in 48 of 68 non-A-cities with populations of more than 100,000 inhabitants.

Andreas Schulten, long-term head of research institute BulwienGesa, on whose figures the Bundesbank relies for drawing up its reports, and also one of the Wise Men, agreed that the trend of rising prices would continue this year. In particular the shortage of office space would become even more acute. Despite rising supply, office space remains in heavy demand, and Schulten sees the phenomenon of firms moving cities to find suitable space is likely to become reality shortly.

He also highlighted the strongly rising demand for nursing homes and healthcare facilities. In 2017 there were 3.41 million people in need of care facilities, or 4.1% of the population, a figure which all the Wise Men agreed can only rise. In 2030 about 675,000 more people will need this care. At the current rate of building, not even half of these elderly people will be catered for, they agreed.