Housing market growth – reversal of trend ahead?

The German housing market has been driven by a huge increase in the number of households, which are rising at a faster rate than the overall population due to ageing, a significant rise in the numbers of single-person households including students, population influx from other countries and increasing urbanization, according to a new study just released.

The latest BNP Paribas Real Estate GmbH rental market report on the top 100 towns and cities points out that the low vacancy rate has been driving asking rents and maintaining market stability.

New construction has not kept up with demand and there is almost no vacancy above the rollover fluctuation rate. The average vacancy is 2.7% but there are regional differences, for example in Germany’s most expensive city Munich where the vacancy rate is just 0.2%. “The primary reason for the significant increase in asking rents in the major agglomerations has been the very low vacancy level, which can only be relieved by an increase in new-build activity” says Head of Residential Investment Christoph Meszelinsky.

The most dynamic market in terms of rental prices is Berlin, where the “catch-up effect” has driven a 61% price hike since 2014. At the other end of the spectrum is Hamburg with an increase of only around 15% over the same period thanks to high levels of new residential completions.

While it certainly appears that living in Germany is becoming ever more expensive, the overall cost of living has risen at a slower rate than incomes, which means it has actually become less expensive over the last decade. Meszelinsky does not expect new-build activity to catch up with the increases in demand any time soon, so the shortfall in supply will continue to drive rents for the time being.

But there are factors which will serve to limit rental price increases going forward, including rent control mechanisms introduced across the various states, reduced mobility caused by the pandemic and condominium ownership. In a traditionally rented market, there is now a developing trend towards home ownership, with ever-increasing transaction volumes and hikes in purchase prices which are now well ahead of rental price increases.

A new survey of rental prices across Germany by the consultancy F+M shows that rents are already stagnating, having risen by only 1.2% over the last year because there are so many towns and cities where rents are actually falling.

The pandemic has shifted market demand from rental to ownership with a corresponding hike in purchase prices and a trend for residential owners to convert formerly rented apartments into condominiums for sale. New-build activity will focus on the construction of units for sale with a greater proportion of detached and semi-detached houses rather than multi-family apartment buildings. According to the Federal Statistical Office, the number of building permits for single family homes rose by 35% in March 2021 compared to the previous month, whilst the number of new permissions for apartment houses fell by over 6%.

A new presentation by the Deutsche Bank’s research division points to a significant decrease in population influx due to the limited mobility caused by the pandemic and also to systemic changes such as the lessening of differences in standards of living and salaries between Germany and countries of origin. In the years 2016 – 2019, there was an inward migration of around 400,000 p.a. but new data suggests that number has now halved to its lowest rate since 2010.

The Deutsche Bank economist Jochen Möbert says that the days of the residential market being driven by scarcity alone could well be numbered. The low interest rate environment has been driving the boom in condominium ownership, which could come to a sudden end if interest rates increase and release a wave of sales. The price hikes themselves have been no bad thing as Germany is a significantly undervalued market compared to many developed countries where residential properties are much more expensive.

In a survey of the 75 most expensive cities worldwide, only Munich features high on the list which means that 38th placed Frankfurt is actually relatively inexpensive for such an important city, which puts the German residential market into context.

The report concludes that the vortex of price increases will soon start to end in the major German cities, probably over the next year. One reason for this is a post-pandemic trend for people to move out of the cities, thus reversing the trend towards urbanisation and bringing demand to areas where property prices are cheaper and where there is less tension in the housing market. The bank also points to ineffective government interference in the housing market as a factor limiting price inflation.

Firstly, the inevitable tightening of requirements in terms of environmental performance and renovations will mean an increase in housing costs for many owners and finally, “no party offers an overall concept” to address the housing problem.