Pace of price increases in Germany to slow, say Pfandbriefbanken

The pace of price rises in German residential property is likely to slow appreciably, although a severe correction is not anticipated, said the president of the Association of German Pfandbrief Banks (VdP – Verband der deutschen Pfandbriefbanken), Dr Louis Hagen, speaking at the Association's annual press conference earlier this month in Frankfurt am Main.

According to Dr. Hagen, “We are not expecting residential property prices to plummet”. He added that the still very robust economic growth as well as the developments in incomes, employment, interest rates and consumer prices remain key drivers of the current boom in the German real estate market. The situation in the residential property markets in Germany’s top seven cities (Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Düsseldorf and Stuttgart) continues to be especially tense.

However, rising nominal interest rates are likely to dampen demand for residential properties, and this will ultimately also affect the trend in prices. There are no signs of a repetition of the vacancy rates which were seen in the residential property market after the construction boom of the 1990s.

In both residential and office construction, high levels of capacity utilisation and the scarcity of building land are also acting as a dampener on excessive exuberance, making the recent sharp growth in capital values compared to rents likely to be short-lived.

The VdP's own property price index, based on real transaction data, showed prices rising by 6.8% on average in 2017, following a rise of 6.4% in 2016. Residential properties went up in price by 6.9% (2016: + 6.5%). Growth was even more pronounced in Germany’s top seven cities, with residential property prices climbing by 13.7% compared with the year before. Prices continued their upward trajectory in the commercial property market, too, rising by 6.5% (2016: +5.8%). Here, prices for office premises saw above-average growth of 8.4% (2016: +7.7%).

Dr. Hagen said that real estate finance has also benefited from positive macroeconomic developments, “which have fuelled the unbroken and high demand in the property market, as well as from the ongoing low-interest-rate environment. Last year, lending volumes remained high. New loan commitments by the Pfandbrief banks in this area were largely unchanged in 2017 following distinct increases in the years before, standing at €143.1bn (2016: €144.4bn)”.

Broken down into the two segments, residential property loans accounted for €74.5bn (2016: €74.2bn) of new commitment activity. On the other hand, commercial property loans totalled €68.5bn (2016: €70.1bn). The figures for public sector financing, meanwhile, reflect budget consolidation by the German federal government and the German federal states, with new commitment activity falling to €14.5bn in 2017 following €15.9bn the previous year. All in all, Pfandbrief banks’ new lending receded by 4.6% last year to €165.3bn (2016: €173.2bn).

Based on a survey conducted among its member banks, the vdp expects that Pfandbrief sales this year will see another slight increase of around €50bn. Of this total, €39bn are likely to be accounted for by Mortgage Pfandbriefe, sales of which are therefore expected to increase once again over the previous year. “Last year, too, the Pfandbrief consolidated its position as an indispensable element of the strategic funding mix of many banks – and retained its benchmark status in the European covered bond market despite growing product diversity,” said Dr. Hagen.

He also reported that steady progress is being made on the regulatory initiatives which the vdp launched and has been closely involved in over recent years. “Regarding the aim of seeing covered bonds harmonised, the publication of the proposal by the European Commission for a directive and a regulation in March 2018 was a major milestone on the path to implementation,” he said.