German residential property prices are set to continue upwards and are fundamentally justified despite the unusually sharp price rises over the past few years, according to a new study produced by consulting firm Kiel Economics Research & Forecasting, and commissioned by Germany’s Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR).
The firm’s calculations show that prices for existing properties doubled between 2009 and 2018, while the prices for new buildings have risen by not much less (+92%) in the same period. Rents for new buildings have increased by around 50%.
While this would normally be a warning sign of rents and prices getting out of kilter, the authors are unfazed by the development. As of the beginning of 2020, the development of housing prices can be "fully" explained by the sharp rise in demand and the fall in interest rates. What's more, the authors forecast that prices will continue to rise, "albeit with a further decline in momentum", assuming that overall economic conditions remain unchanged. The reason for this is that "the decline in interest rates to date has not yet been fully factored in.”
The researchers are basically unconcerned about price excesses or bubbles in the Big 7 most populous cities of Berlin, Hamburg and Munich, Düsseldorf, Cologne, Frankfurt and Stuttgart. Although the increase in rents since 2011 has been lower than it should have been according to the calculation model, taking into account the low level of interest rates, "even the sharp price increases in cities such as Munich, Hamburg and Düsseldorf can be described as fundamentally justified".
Rival economists from empirica and the German Institute for Economic Research have come to a different conclusion, at least for the moment. Kiel Economics' findings, such as "risk of a price bubble", are based on the fact that the main focus of their rivals’ alternative conclusions was because of their heavy weighting on how prices develop in relation to rents – and have not paid sufficient attention to the relationship between property prices and interest rates.
Nonetheless, Kiel Economics sounds a cautious note on continuing to monitor the residential market closely. Helpful for this are "timely data on the expectations of market participants” and closing the "most important data gap" - regular surveys commissioned by the German Bundesbank, which track private individuals’ expectations regarding residential rents and prices and interest rate developments, among other things.
