Despite the global pandemic, Germany’s long-running house price boom continues strong, thanks to low interest rates, weak construction supply, as well as the increased demand from more than 1 million refugees. In a country where the housing market has historically been extraordinarily stable, this is a significant shift.

The German hedonic price index rose by 11.12% (9.28% inflation-adjusted) during the year to Q1 2021, its 45th straight quarter of y-o-y rises, according to Europace figures. Hedonic price indices attempt to compare like-for-like exactly, so are the best measure of house price trends.

Source: Europace

Quarter-on-quarter, nationwide house prices rose by 3.23% (1.33% inflation-adjusted) during the latest quarter.

By property type:

• Apartment prices rose by 11.46% (9.61% inflation-adjusted) during the year to Q1 2021, slightly lower than the 13.61% increase registered in Q1 2020. In a quarterly basis, apartment prices rose by 4.02% (2.1% inflation-adjusted).
• New home prices rose by 7.51% (5.73% inflation-adjusted) y-o-y and by 1.63% (-0.24% inflation-adjusted) q-o-q.
• Existing home prices surged by 14.73% (12.83% inflation-adjusted) y-o-y and by 4.07% (2.15% inflation-adjusted) q-o-q.

The German housing market was one of the few that avoided a slump in the wake of the 2008-2009 global financial crisis. And now, it is poised to escape again the fallout from the COVID-19 pandemic. Strong house price rises are expected to continue this year, buoyed by low interest rates, as well as the prevailing supply shortage in major cities.

“More than €20 billion marks a new multi-year record high for the investment volume 2020,” said CBRE in its 2021 Real Estate Market Outlook report for Germany. “Activity in the German residential investment market can be expected to run at an uninterruptedly high level in 2021.”

This is supported by Deutsche Bank AG in its German Property Market Outlook 2021 report: “The cycle is likely to remain intact in 2021 thanks to the low interest rate environment, fundamental supply shortage and current undervaluation.”

Today’s rapidly rising residential prices reflect a delayed response to a long period in which Germany has not built enough. After the mid-1990s there was a substantial drop in housing completions, in part caused by policy changes such as a rise in VAT from 3% to 19% in 2007, and the abolition of owner purchase subsidies.

From an annual average of 476,000 permits from 1992 to 1999, dwelling permits fell substantially to an average of 222,000 permits every year from 2001 to 2015.

However recent extremely low interest rates and bond yields have encouraged persistently growing demand, despite the fact that most German mortgage borrowers borrow on long-term interest rates, which are higher than “tracker” rates. In February 2021, the average interest rate for new housing loans was 1.17%, down from 1.28% a year earlier and 1.78% two years ago, according to Deutsche Bundesbank.

The migration crisis has added to the pressure. According to the UN’s High Commissioner for Refugees, Germany is hosting the fifth most refugees of any nation, at about 1.1 million - the highest number of any developed Western country.

Housing supply is not keeping up with this demand. Dwelling permits increased 3.8% y-o-y to 360,578 units in 2019 and by another 2.2% to 368,400 units in 2020, following y-o-y declines of 0.3% in 2018 and 7.3% in 2017, according to Destatis - insufficient to meet surging demand. The country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

During 2020, Germany’s economy contracted by 5%, less than expected.  It was a smaller decline than the 5.7% contraction during the global financial crisis. The European Commission expects the German economy to grow by 3.2% this year and by another 3.1% in 2022.

Moderate rental yields in Germany

Germany’s rental yields are poor to moderate, partly because of recent strong price rises, but more importantly because investment in housing (including buy-to-let) used to be heavily subsidized by tax-breaks. Many Germans live in rented accommodation, and only 51% of Germany’s total households own their homes, according to Eurostat.

Rental yields range from 3.5% to 3.7% in Germany’s major cities, according to Global Property Guide research:

• In Munich a 120 sq. m. apartment might rent for around €2,250 a month, earning a yield of 3.5%.
• In Berlin a 120 sq. m. apartment might rent for around €1,500 a month, earning a yield of 3.5%
• In Frankfurt, a 120 sq. m. apartment might rent for around €1,700 a month, earning a yield of 3.7%.

While rents continue to increase, they are hardly keeping pace with price rises. Rents for existing contracts rose by 121.6% from 1990 to 2020, while rents for new contracts rose by 85.9%. On the other hand, the average price of apartments rose by 145.5%, while the price of terraced houses rose by 129%, according to BulwienGesa.

Local house price variations

In North-East Germany:

• In Berlin apartments continued to register strong price rises (7.2%) during 2020 to a median price of €4,743 (US$5,707) per square metre (sq. m.). The median price of one- and two-family houses rose by 12.3% y-o-y to €3,350 (US$4,031) per sq. m.
• In Hannover apartment prices rose by 8.1% to a median price of €2,877 (US$3,462) per sq. m. during 2020. Likewise, the median price of one- and two-family houses increased 11.2% to €2,455 (US$2,954) per sq. m.
• In Dresden, median apartment prices rose by a modest 4.1% to €2,926 (US$3,521) per sq. m. during 2020, while one- and two-family houses increased 9.3% to €2,735 (US$3,291) per sq. m.
• In Hamburg, median apartment prices rose by 9.5% y-o-y to €4,750 (US$5,716) per sq. m. in 2020. One- and two-family houses rose by 11.3% to €3,282 (US$3,949) per sq. m.

In West Germany:

• Dortmund had the highest apartment price increase in the region, rising by 12.4% to €2,071 (US$2,492) per sq. m. during 2020. Prices of one- and two-family houses also rose by 11.1% to €2,512 (US$3,023) per sq. m.
• In Cologne, median apartment prices rose by 10.6% y-o-y to €3,609 (US$4,343) per sq. m. in 2020. One- and two-family houses had a price increase of 10.2% y-o-y to €2,881 (US$3,467) per sq. m.
• In Düsseldorf, median apartment prices rose by 6.9% to €3,338 (US$4,017) per sq. m. during 2020 while the median price of one- and two-family houses increased 7.5% to €2,944 (US$3,543) per sq. m.

In South Germany:

• In Munich, the median apartment price rose by 5.1% y-o-y to €7,882 (US$9,485) per sq. m. in 2020. Prices of one- and two-family houses rose by 6.4% to €5,806 (US$6,987) per sq. m. over the same period.
• In Frankfurt, apartment prices rose by 5.5% to €4,138 (US$4,979) per sq. m. during 2020. One- and two-family houses had a y-o-y price increase of 10.4% to €3,210 (US$3,863) per sq. m.
• Stuttgart had the strongest y-o-y apartment price hike in South Germany in 2020, increasing by 7.3% y-o-y to a median price of €4,037 (US$4,858) per sq. m. On the other hand, the median price of one- and two-family houses rose by 10.6% to €3,782 (US$4,551) per sq. m.

All figures from Dr. Klein’s trend indicator of property prices (DTI).

Berlin

Germany’s capital, Berlin, is the seventh most populous urban area in the European Union. The city’s residential sector has been boosted by its young population and growing reputation as a European creative and media hub. It hosts several renowned universities, orchestras, museums, entertainment venues and other creative industries.

It ranked 13th out of 231 cities included in the Mercer’s Quality of Living Index.

For several years, Berlin has recorded a population growth of about 40,000 to 60,000 annually, mainly due to inward migration. Berlin has currently a population of around 3.6 million and an average population growth rate of 5% in the past five years. Yet last year, population declined slightly after international inward migration has been adversely impacted by the pandemic.

“International inward migration had been seriously affected by the COVID-19 movement restrictions. [But] This development must be interpreted as being crisis-related and therefore a short-term effect, and the additional requirement for new housing will remain at a high level,” said JLL.

According to JLL’s forecast, Berlin requires about 18,500 new apartments annually until 2030 to address the severe housing shortage in the city. And the introduction of a rent price cap (Berliner Mietendeckel) last year is expected to exacerbate the situation.

On January 30, 2020, Berlin adopted a law to freeze rents in the city, which came into force on February 23, 2020. The rent cap covers all residential space completed before January 1, 2014, with rents frozen at the level of the rent on June 18, 2019. The law prohibits rent increases until 2021 with monthly maximum rent fixed between €3.92 and €9.8 per square metre, depending on the year of completion and the standard of the residential property. Rent increases of 1.3% per year will be permitted starting 2022.

Hamburg

Hamburg is “Germany’s Gateway to the World”, and its port is Europe’s third largest. It is Germany’s second largest city, and the eighth largest in the European Union. It is a major tourist destination, and its Speicherstadt was declared a World Heritage Site by UNESCO in July 2015.

The city has flourishing small and medium-sized enterprises, as well as its international trade and business services sectors. Hamburg’s population growth was around 4.6% in the past six years.

To meet the strong demand, construction activity in Hamburg has been rising remarkably strongly in recent years. Hamburg’s Senate recently set a new-build target of 10,000 homes per annum and the city council plans to designate further large contiguous areas of land for housing construction.

“There are a number of observations in Hamburg which give grounds for optimism that the high level of construction activity of the last few years will continue over the coming years: the number of new building permits issued has not only risen continually over the last few years, but actually exceeded the level of completions,” said JLL.

While most of these ongoing constructions were located in the central districts of Altona and HafenCity, planned residential projects are also increasingly to be found to the south of the River Elbe, on the outskirts of the city and also to the east, according to JLL.

Munich

Munich is Germany’s third largest city and is home to many major universities, museums, and architectural attractions. It is a traffic hub and is one of Germany’s fastest growing cities. It ranked highest (overall: 3rd out of 231 cities) among major German cities in Mercer’s Quality of Living Index.

Due to the booming economy, continuously rising birth rates, and economic immigration, especially of young people between 18 and 30 years of age, the city’s population has been growing strongly. Despite the pandemic, Munich’s population grew by 1% to 1.562 million in 2020. Demand will remain strong in the coming years. To meet current and future demand, the city council has set a goal of building about 120,000 apartments by 2030.

Construction has shifted increasingly from the city centre towards the outskirts and less densely developed districts in the past few years.

“Munich’s city council is promoting the construction of large residential estates in suburban areas,” said JLL. “There is no alternative to this in view of the increasing scarcity of building land and the high land prices.”

Cologne

Cologne, Germany’s fourth largest city, hosts more than thirty museums and hundreds of galleries.

With population growth of about 4.1% since 2013 and supply growth of barely 2%, there is clearly a housing shortage in the city. Completions were just between 2,000 and 3,000 units in recent years, significantly lower than the local government’s target of 4,800 new apartments annually.

“Cologne’s residential market has the widest gap between additional demand and the current level of completions [of the Big 8 cities],” said JLL. “With an average annual requirement of around 4,200 new homes in the period up to 2030, the estimated requirement is around twice the level of completions.”

Frankfurt

Frankfurt is the fifth largest city in Germany. It is Germany’s financial centre and is known for its major trade fairs such as Messe Frankfurt, one of the largest in the world; Frankfurt Motor Show, the largest motor show in the world; and Frankfurt Book Fair, also the largest in the world. It ranked 7th in the Mercer’s Quality of Living Index.

Frankfurt saw substantial population growth of 50,000 from 2014 to 2020, according to JLL.  Inward migration, especially amongst the 18 to 30-year age group, remains high. Population growth is focused on the large new-build districts such as Riedberg in the north (peripheral districts) and the Europaviertel (City Centre I).

Housing completions averaged around 3,500 annually over the past five years and continues to surge, in an effort to meet strong demand. However, most construction activity is focused in the upper price segment, in the form of residential towers and high-end condominium apartments.

Stuttgart

Stuttgart is Germany’s sixth largest city, and is known as the Cradle of the Automobile. It ranked 27th in Mercer’s latest Quality of Living Index.

The number of households grew by 4.3% annually in the past five years while housing stock increased by just 2.4% units per year. However in 2020, the city’s population fell for the first time by 1.1% from a year earlier to 608,000, according to JLL, partly due to pandemic-related movement restrictions.

The local government set an annual target of 1,800 new homes over the next ten years, but given the current construction deficit and the fact that Stuttgart has the lowest number of completions per inhabitant among Germany’s major cities, it is now doubtful whether the city’s target is sufficient to meet existing and future demand.

Publicly owned housing companies and cooperatives, were the city’s biggest net investors, followed by professional asset and fund managers.

Düsseldorf

Düsseldorf, Germany’s seventh largest city has a population of about 650,000. Since 2011, the city’s population growth was around 8.7% while the number of households increased by has risen by 3.5%. It ranked 6th in Mercer’s Quality of Living Index.

“However, the dynamic population growth has recently slowed as a result of the absolute low level of net inward migration and the COVID-19 movement restrictions,” said JLL. “Nonetheless, it is anticipated that there will be a continuing requirement for additional housing over the coming years.”

Like other German cities, housing supply in Düsseldorf is not keeping up with demand. Based on JLL forecast, the city has an additional annual requirement of about 1,800 to 3,000 residential units until 2030. To meet the current excess and steadily growing demand, the local government set an annual completion target of 3,000 units annually in the coming years.

The influx of refugees exacerbates housing shortage

Germany took in around 1.1 million asylum seekers in 2015 and another 280,000 refugees in 2016. In September 2017, Chancellor Angela Merkel agreed to cap the number of refugees Germany accepts at 200,000 annually.

Aside from tight housing supply, one problem is that refugees tend to locate themselves in big cities, such as Berlin, where the housing supply is even tighter. They compete for housing units with locals and migrants (mainly from other parts of Europe) who are in the country to work, resulting in further pressure on house prices.

In 2020, Germany recorded 102,500 asylum applicants – accounting for about 24.6% of all first-time applicants in the EU-27, according to the Eurostat. Though this is down by 28% from a year earlier and the fourth year in a row that first-time asylum applications have fallen.

“Due to the COVID-19 outbreak, and the related introduction of movement restrictions and border closures, some countries have applied certain administrative measures (e.g. temporary closure of asylum authorities, suspension of asylum interviews, suspension of lodging applications), which resulted in a drop in the number of asylum applications in 2020,” said the Eurostat.

On December 31, 2020, the German government lifted the ban on deportations of Syrian nationals, allowing the country to deport those deemed to pose a risk to security. The ban had been in place since 2012 and has been repeatedly extended due to the ongoing civil war in Syria.

Germany’s conservative mortgage market

The mortgage market was equivalent to 47% of the country’s GDP in 2020 - an unusually low level for a developed economy, a huge plunge from 82.2% of GDP in 1998. During 2020, outstanding housing loans amounted to €1.57 trillion (US$1.89 trillion), up by 6.5% from a year earlier, according to the Deutsche Bundesbank.

Germans’ conservative borrowing is often attributed to the hyperinflation experienced in the 1920s, says Deutsche Bank real estate economist JochenMoebert. However, the changes in tax incentives are likely to be a better explanation of the general decline in the mortgage loans to GDP ratio.

Housing loan interest rates continue to fall

Germany homebuyers mostly borrow loans at a fixed rate. In 2020, the share of loans with interest rate fixation (IRF) of 5 years or more was 82% of total loans, up from the previous year’s 80.8% and far higher than the 64.4% share in 2009.

In contrast, loans with IRF of up to one year have never exceeded 20% of new loans approved, and declined to just 10.5% of total loans approved in 2020. This interest rate profile gives considerable stability to the German housing market, which tends not to suffer from sudden lurches in the value of houses.

An important explanation for Germany’s interest-rate stability is the loan sources of Germany’s banks, which borrow long, and so are keen to lend long-term.

In February 2021, the average interest rate for new housing loans was 1.17%, down from 1.28% a year earlier and 1.78% two years ago, according to Deutsche Bundesbank. Over the same period:

• IRF up to 1 year: 1.73%, down from 1.82% a year earlier
• IRF 1-5 years: 1.28%, slightly down from 1.33% a year earlier
• IRF 5-10 years: 1.04%, down from the previous year’s 1.13%
• IRF over 10 years: 1.14%, down from the previous year’s 1.26%

Housing loan interest rates in Germany have been falling since late-2008, following ECB rate cuts. Since March 2016 the ECB base rate has been at 0%.

Pandemic-induced economic recession

During 2020, Germany’s economy contracted by 5%, a smaller decline than the 5.7% contraction recorded during the global financial crisis, as massive government stimulus measures helped lessen the impact of the COVID-19 pandemic.

Even before the pandemic, Europe’s biggest economy was already slowing, with GDP growth of only 0.6% in 2019, a sharp slowdown from an annual average growth of 2% in 2014-18, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

The European Commission expects the German economy to grow by 3.2% this year and by another 3.1% in 2022.

Germany recorded a budget deficit of about €189.2 billion (US$228.9 billion) in 2020, the first shortfall since 2013 and the highest level since reunification in 1991, according to Destatis. As percent of GDP, the shortfall was equivalent to 4.2% last year.  Public debt surged to 69.8% of GDP in 2020, sharply up from 59.7% of GDP in 2019 and the highest level since 2015, according to Eurostat.

Germany’s seasonally-adjusted unemployment rate was 4.5% in February 2021, up from 3.6% a year earlier, according to the Eurostat.

Germany’s inflation increased to 1.7% in March 2021, the highest since February 2020, according to figures from Destatis, as the temporary reduction of the VAT rates already finally ended. Inflation is expected to accelerate to 2.3% this year, from just 0.4% in 2020, according to the European Commission.

Sources:

• Index EPX hedonic (Europace): https://report.europace.de/epx-hedonic/
• Property Market Index 1975 – 2020 (bulwiengesa): https://www.bulwiengesa.de/sites/default/files/propertymarketindex_2021.pdf
• Real estate in the south: The housing market is particularly tense (Dr. Klein): https://www.drklein.de/immobilien-sueden-angespannter-haeusermarkt.html
• Homeownership in the west: prices continue to climb (Dr. Klein): https://www.drklein.de/wohneigentum-im-westen-preise-klettern-weiter.html
• Berlin Residential City Profile (JLL): https://www.jll.co.uk/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Berlin-JLL-Germany.pdf
• Hamburg Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Hamburg-JLL-Germany.pdf
• Munich Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Munich-JLL-Germany.pdf
• Cologne Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Cologne-JLL-Germany.pdf
• Frankfurt Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Frankfurt-JLL-Germany.pdf
• Stuttgart Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Stuttgart-JLL-Germany.pdf
• Düsseldorf Residential City Profile (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Residential-City-Profile-Dusseldorf-JLL-Germany.pdf
• Investment Market Overview (JLL): https://www.jll.de/content/dam/jll-com/documents/pdf/research/emea/germany/en/Investment-Market-Overview-JLL-Germany.pdf
• Building permits for dwellings in January 2021: +5.1% on a seasonally and calendar adjusted basis compared with the previous month (Destatis): https://www.destatis.de/EN/Press/2021/04/PE21_173_31111.html;jsessionid=98FFDCF24CC6EEC32CE4CC2DD1912726.live742
• Building permits, total (Destatis): https://www.destatis.de/EN/Themes/Economy/Short-Term-Indicators/Building-Permits/buw110.html
• Dwelling stock of 42.5 million dwellings at the end of 2019 (Destatis): https://www.destatis.de/EN/Press/2020/07/PE20_281_31231.html
• Economic forecast for Germany (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/germany/economic-forecast-germany_en
• Poor buy-to-let yields in Germany’s big cities (Global Property Guide): https://www.globalpropertyguide.com/Europe/Germany/Rental-Yields
• World Economic Outlook Database, April 2021 (International Monetary Fund): https://www.imf.org/en/Publications/WEO/weo-database/2021/April/select-subjects?c=134,
• Germany’s public deficit reaches highest level since reunification (Xinhuanet): http://www.xinhuanet.com/english/europe/2021-04/07/c_139864787.htm
• Consumer price index for Germany (Destatis): https://www.destatis.de/EN/Themes/Economy/Short-Term-Indicators/Basic-Data/vpi001j.html
• Housing loans to households / Mortgage loans secured by residential real estate (Bundesbank): https://www.bundesbank.de/en/statistics/money-and-capital-markets/interest-rates-and-yields/housing-loans-to-households-mortgage-loans-secured-by-residential-real-estate-621950
• Quality of living city ranking (Mercer): https://mobilityexchange.mercer.com/insights/quality-of-living-rankings
• Asylum statistics (Eurostat): https://ec.europa.eu/eurostat/statistics-explained/index.php/Asylum_statistics#Main_countries_of_destination:_Germany.2C_Spain_and_France
• What the end of Germany´s deportation ban could mean for Syrians (Infomigrants): https://www.infomigrants.net/en/post/29514/what-the-end-of-germany-s-deportation-ban-could-mean-for-syrians
• Outlook for the German residential property market 2021 and beyond (Deutsche Bank Research): https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000517463/Outlook_for_the_German_residential_property_market.pdf?undefined&realload=tOK9aq7OKKeZcU/gC7i0LI4JWOEgA/QklFI9CWrj2dsxGLkMsX0CCjKswkwxEA2/bv8~h3zlYjke4vgOVTytNg==
• Poor buy-to-let yields in Germany´s big cities (Global Property Guide): https://www.globalpropertyguide.com/Europe/Germany/Rental-Yields
• Real Estate Market Outlook Germany (CBRE): http://cbre.vo.llnwd.net/grgservices/secure/Germany%20Market%20Outlook%202021_EN.pdf?e=1619401744&h=1bb83b57c7fe5747f9aa07a7f952e38d