After five years of robust house price rises, Germany’s housing market continues to grow even stronger. In a country where the housing market has historically been extraordinarily stable, this is a significant shift.

The reasons? decade-long economic growth, more than 1 million refugees, high work-related immigration, record-low unemployment, weak construction supply and low interest rates.

The German hedonic price index rose by 10.93% (10.32% inflation-adjusted) in May 2020 from a year earlier (hedonic indices attempt to compare like-for-like exactly, so are the best measure of house price trends), the highest price growth ever recorded for the month of May, based on Europace figures.

During the year to May 2020:

• Apartment prices rose by 11.81% (11.2% inflation-adjusted), up from a y-o-y rises of 10.22% in May 2019 and 4.8% two years ago.
• New home prices rose by 8.04% (7.45% inflation-adjusted), up from a y-o-y rise of 7.95% in a year earlier and 5.44% two years ago.
• Existing home prices rose by 13.28% (12.66% inflation-adjusted), up from the annual growth of 8.91% in the previous year and 9.03% two years earlier.

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 seems that it is poised to escape again the fallout from the COVID-19 pandemic.

“We are sticking with our assessment that the house price cycle will sustain itself until 2022 at least,” said a Deutsche Bank in its German Property Market Outlook 2020 report. “There are two reasons for this: The first of these is the sluggish supply of new homes, with numbers having virtually stagnated in recent years. Secondly, the credit cycle jumped sharply in 2019, which could spark even more dynamic growth in house and apartment prices.

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.

Residential property transaction volumes in Germany rose by 7% to €20 billion (US$22.5 billion) in 2019 from a year earlier, according to JLL. It represents the second-highest transaction volume since records began.

Low construction activity is another reason for the continued increase in house prices. Housing supply is not keeping up with demand. In 2019, dwelling permits increased 3.8% y-o-y to 360,578 while dwelling completions rose by 2% y-o-y to 293,000 units, according to Destatis. Yet it remains insufficient, due to a rising urban population and surge of migrants. In the medium term, the country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

The migration crisis has added to the pressure. According to the UN’s High Commissioner for Refugees, Germany is hosting the fifth most refugees, at 1.06 million, compared to any other nation, and the most of any other developed Western country.

But unlike the housing market, the overall German economy is now in recession. In Q1 2020, real GDP shrank by 2.2%, following a 0.1% decline in Q4 2019. It was the biggest quarterly drop since the 2008 financial crisis. But even before the coronavirus pandemic, Europe’s biggest economy wasalready slowing. In 2019, the economy grew by a minuscule 0.6%, its weakest performance since 2013, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

The economy is projected to contract by 6.5% this year before returning to a 5.9% growth in 2021, based on figures from the European Commission.

Moderate rental yields in Germany

Germany’s rental yields are poor to moderate, partly because of recent 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, while 51.8% 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%.

Rent rises are broadly keeping pace with price rises. Rents for existing contracts rose by 116.3% from 1990 to 2019, while rents for new contracts rose by 79.8%. On the other hand, the average price of apartments rose by 130.6%, while the price of terraced houses rose by 112.7%, according to BulwienGesa.

Local house price variations

In North-East Germany:

• In Berlin apartments saw strong price rises of 13.07% in Q1 2020 to a median price of €4,578 (US$5,145) per square metre (sq. m.). The median price of one- and two-family houses rose by 14.35% y-o-y to €3,066 (US$3,446) per sq. m.
• In Hannover apartment prices rose by 11.88% to a median price of €2,750 (US$3,090) per sq. m. during the year to Q1 2020. Likewise, the median price of one- and two-family houses increased 8.93% to €2,294 (US$2,578) per sq. m.
• In Dresden, median apartment prices rose by 9.7% to €2,680 (US$3,012) per sq. m. during the year to Q1 2020, while one- and two-family houses increased 8.12% to €2,576 (US$2,895) per sq. m.
• In Hamburg, median apartment prices rose by 9.68% y-o-y to €4,329 (US$4,865) per sq. m. in Q1 2020. One- and two-family houses rose by 10.39% to €3,072 (US$3,452) per sq. m.

In West Germany:

• Dusseldorf had the highest apartment price increase in the region, rising by 12.83% to €3,329 (US$3,741) per sq. m. during the year to Q1 2020. Prices of one- and two-family houses also rose by 12.29% to €2,793 (US$3,139) per sq. m.
• In Cologne, median apartment prices rose by 11.4% y-o-y to €3,297 (US$3,705) per sq. m. in Q1 2020. One- and two-family houses had a price increase of 11.45% y-o-y to €2,667 (US$2,997) per sq. m.
• In Dortmund, median apartment prices rose by 5.6% to €1,829 (US$2,055) per sq. m. during the year to Q1 2020 while the median price of one- and two-family houses increased 11.08% to €2,378 (US$2,672) per sq. m.

In South Germany:

• In Munich, the median apartment price rose by 9.14% to €7,644 (US$8,590) per sq. m. during the year to Q1 2020. Prices of one- and two-family houses rose by 11.52% to €5,624 (US$6,320) per sq. m. over the same period.
• In Frankfurt, apartment prices rose by 10.64% to €3,873 (US$4,353) per sq. m. during the year to Q1 2020. One- and two-family houses had a y-o-y price increase of 6.76% to €3,035 (US$3,411) per sq. m.
• Stuttgart had the strongest y-o-y apartment price hike in South Germany in Q1 2020, increasing by 11.51% y-o-y to a median price of €3,829 (US$4,303) per sq. m. On the other hand, the median price of one- and two-family houses rose by 6.47% to €3,556 (US$3,996) 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.

For several years, Berlin has recorded a high 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. It ranked 13th out of 231 cities included in the Mercer’s 2019 Quality of Living Index.

Unsurprisingly, Berlin is facing a severe housing shortage. Currently, there is a 100,000 dwellingshortfall in new housing construction, according to JLL. And the introduction of a rent price cap (Berliner Mietendeckel) early this year is expected to exacerbate the situation.

“The decision to cap rents, combined with bureaucratic obstacles and the dwindling availability of potential land, is stifling the willingness to invest in Berlin’s residential rental market,” said JLL. “As a consequence, the rental price cap not only contradicts the housing policy objective of creating more residential space, but will inevitably aggravate the housing shortage still further.”

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 remarkably rising in recent years. In fact Hamburg 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.

“While the highest volume of land currently under construction is in Altona and the north of the city, and therefore predominantly in central locations, 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,” said JLL.

“Other potential areas for long-term residential development are to be found to the south and southeast of the city, such as in KleinerGrasbrook and Wilhelmsburg, and to the east between Tonndorf and Wandsbek.”

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 2019 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, a population growth of up to 20% is expected, JLL noted. As expected, demand will remain strong in the coming years. To meet the current and future demand, the city council set a goal of building about 120,000 apartments by 2030.

Though construction activity in Munich has shifted increasingly from the city centre and downtown neighbourhoods towards the outskirts and less densely developed districts in the past few years.

“To alleviate the shortage of living space, two new development zones are at the planning stage on the last of the available large sites within the city limits,” said JLL. “A new residential district with around 1,300 apartments is envisaged for Lerchenauer Feld, a 23-hectare site in the district of Feldmoching, for which the approval decision is expected in 2022. There is also a controversial planning zone in the northeast of Munich between Daglfing and Johanneskirchen, which has development potential for up to 30,000 apartments on 600 hectares of undeveloped farmland.”

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 6,000 new apartments annually, including about 1,000 planned subsidized units.

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 2019 Quality of Living Index.

The city’s population - which is currently at about 777,000 - is forecast to reach over 820,000 by 2035. 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 2019 Quality of Living Index.

Due to the strong local economy and the sustained demand for manpower, the city experiences high net inward migration and consequently a continuous growth in population. 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, according to JLL.

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, according to JLL.

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 more than 600,000. 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 2019 Quality of Living Index.

Like other German cities, housing supply in Düsseldorf is not keeping up with demand. In fact since 2017, the volume of completions has fallen by 27% while the number of permits issued dropped 33%, according to JLL.

“The strong labour market and high standard of living in the city of Düsseldorf ensure dynamic population growth,” said JLL. To meet the current excess and steadily growing demand, the local government set an annual completion target of 3,000 units annually until 2025.

Supply remains insufficient despite rising construction activity

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.In 2019, dwelling permits increased 3.8% y-o-y to 360,578 while dwelling completions rose by 2% y-o-y to 293,000 units, according to Destatis. In the medium term, the country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

Residential property transaction volumes in Germany rose by 7% to €20 billion (US$22.5 billion) in 2019 from a year earlier, according to JLL.  This represents the second-highest transaction volume since records began. Foreign investors, particularly from Israel, France, and the UK, represent about a quarter of direct residential property investments in Germany.

Germany had a total dwelling stock of about 42.2 million units by early-2019, up by 0.6% from a year earlier.

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 2019, Germany recorded 142,400 asylum applicants – accounting for about 23.3% of all first-time applicants in the EU-27, according to the Eurostat. Though this is down 14.3% from a year earlier and the third year in a row that first-time asylum applications have fallen.

“The numerous measures of recent years against uncontrolled immigration are working…  [however] migration pressure at the [EU’s] external borders and to Germany remains high,” said Interior Minister Horst Seehofer.

According to the UN’s High Commissioner for Refugees, Germany is hosting the fifth most refugees, at 1.06 million, compared to any other nation, and the most of any other developed Western country.

Germany’s conservative mortgage market

The mortgage market was equivalent to 42.7% of the country’s GDP in 2019 - an unusually low level for a developed economy, a huge plunge from 82.2% of GDP in 1998. As of Q1 202o, outstanding housing loans amounted to €1,488.6 billion (US$1,672.9 billion), up by 6% 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 2019, the share of loans with interest rate fixation (IRF) of 5 years or more was 80.8% of total loans, slightly up from the previous year’s 79.5% 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 11% of total loans approved in 2019. 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 April 2020, the average interest rate for new housing loans was 1.25%, down from 1.67% a year earlier and 1.89% two years ago, according to Deutsche Bundesbank. Over the same period:

• IRF up to 1 year: 1.78%, down from 2.04% a year earlier
• IRF 1-5 years: 1.31%, down from 1.48% a year earlier
• IRF 5-10 years: 1.1%, down from the previous year’s 1.53%
• IRF over 10 years: 1.22%, down from the previous year’s 1.72%

Housing loan interest rates in Germany fell sharply from late-2008 to 2015, following ECB rate cuts. Since March 2016 the ECB base rate has been at 0%.

Economic recession

The German economy fell into recession at the start of 2020, with real GDP shrinking by 2.2% in Q1 2020 following a 0.1% decline in Q4 2019. It was the biggest quarterly drop since the 2008 financial crisis.

Even before the coronavirus pandemic, Europe’s biggest economy was already slowing. In 2019, the economy grew by a minuscule 0.6%, its weakest performance since 2013, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

The economy is projected to contract by 6.5% this year before returning to a 5.9% growth in 2021, based on figures from the European Commission .

Germany is expected to post a deficit equivalent to 7% of GDP this year, following the introduction of a €130 billion (US$146 billion) stimulus package.In 2019, Germany posted a general government surplus of €49.8 billion (US$56 billion), its eight consecutive year in a row, based on figures released by Destatis , equivalent to 1.4% of the country’s GDP, from 1.9% in 2018 and 1.2% in 2017.

Germany’s unemployment rate was 6.1% in May 2020, sharply up from 4.9% a year earlier, due to the COVID-19 outbreak.

Germany’s annual inflation rate was 0.6% in May 2020, down from 1.4% a year earlier and the slowest pace since August 2016, based on figures from Destatis . Overall inflation rate is expected to slow to 0.3% this year, according to the European Commission .

Sources:

• Index EPX hedonic (Europace): https://report.europace.de/epx-hedonic/
• Property Market Index 1975 – 2019 (bulwiengesa): https://www.bulwiengesa.de/sites/default/files/propertymarketindex_2020_0.pdf
• Real estate prices in Munich, Frankfurt and Stuttgart are rising - sometimes with less dynamism (Dr. Klein): https://www.drklein.de/preise-immobilien-muenchen-frankfurt-stuttgart.html
• Real Estate Markets in Western Metropolises: Immune to Corona? (Dr. Klein): https://www.drklein.de/immobilienmaerkte-westen.html
• Hanover, Hamburg, Dresden, Berlin: Development of property prices and forecasts (Dr. Klein): https://www.drklein.de/immobilienpreise-hannover-hamburg-berlin-dresden.html
• German residential investment market reaches the 20bn euros mark (JLL): https://www.jll.de/en/newsroom/german-residential-investment-market-reaches-the-20-euros-bn-mark
• Number of transactions fell further in May (Savills Germany): https://en.savills.de/research_articles/259694/295306-0
• German Property Market Outlook 2020 (Deutsche Bank Research): https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000507651/German_property_market_outlook_2020.pdf
• Mercer’s Cost of Living Survey 2020 (Mercer): https://www.mercer.com/newsroom/2020-cost-of-living.html
• Quality of living city ranking (Mercer): https://mobilityexchange.mercer.com/Insights/quality-of-living-rankings
• Residential City Profile Berlin - H2 2019 (JLL): https://www.jll.co.uk/en/trends-and-insights/research/residential-city-profile-berlin
• Dwellings completed in 2019: +2.0% on the previous year (Destatis): https://www.destatis.de/EN/Press/2020/06/PE20_199_31121.html
• Increase of dwellings permitted from January to March 2020: 4.0% (Destatis): https://www.destatis.de/EN/Press/2020/05/PE20_174_31111.html
• Housing stock in Germany (Destatis): https://www.destatis.de/DE/Themen/Branchen-Unternehmen/Bauen/Tabellen/wohnungsbestand-deutschland.html
• Poor buy-to-let yields in Germany´s big cities (Global Property Guide): https://www.globalpropertyguide.com/Europe/Germany/Rental-Yields
• Refugee numbers in Germany fall for third year in a row (IZA World of Labor): https://wol.iza.org/news/refugee-numbers-in-germany-fall-for-third-year-in-a-row
• Asylum statistics (Eurostat): https://ec.europa.eu/eurostat/statistics-explained/index.php/Asylum_statistics#Main_countries_of_destination:_Germany.2C_France_and_Spain
• World Economic Outlook Databases (International Monetary Fund): https://www.imf.org/en/Publications/SPROLLS/world-economic-outlook-databases#sort=%40imfdate%20descending
• 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
• Germany posts worst annual growth since 2013 (CNBC): https://www.cnbc.com/2020/01/15/germany-full-year-gdp-2019.html#:~:text=The%20German%20economy%20grew%20at%200.6%25%20in%202019%2C%20according%20to,from%20economists%20polled%20by%20Reuters.
• Consumer price index for Germany (Destatis): https://www.destatis.de/EN/Themes/Economy/Short-Term-Indicators/Basic-Data/vpi001j.html
• General government recorded surplus of 49.8 billion euros in 2019 (Destatis): https://www.destatis.de/EN/Press/2020/02/PE20_057_813.html