During the current real-estate cycle, i.e., from 2009 to 2017, house prices have risen 80% in large metropolitan areas (A cities) and c. 60% in B and C cities. In 2017, the number of newly completed residential units looks likely to have risen to more than 300,000 for the first time in the current cycle; in 2018, it might climb to 335,000. However, assuming that there is demand for at least 350,000 new apartments, the gap between supply and demand should continue to widen in both years. As demand remains high, upward price pressure will continue. This suggests that prices and rents will rise further in all major cities. Overvaluations are rising, and the risk of a price bubble on the German housing market is increasing. The price uptrend is likely to continue for several years to come, at least in most major cities in Germany.

  • In Munich, apartment prices more than doubled between 2009 and 2017. During the same time, the population rose from 1.36 million to 1.53 million. There is a shortage of several tens of thousands of residential units. The vacancy rate is near zero, and current and planned future building activities will not suffice. The supply shortages should drive house prices and rents upwards in the coming years.

  • In Berlin, house and apartment prices were up c. 10% yoy in 2017. Unemployment rates have dropped to record lows, and employment growth is strong. New construction activity is sluggish. The gap between permits and completions remains large. The price and rent increase looks set to continue at the same pace in 2018.

  • Frankfurt’s population is growing by c. 8,000 per year. The excellent labour market situation stimulates demand, and supply is scarce. There is a shortfall of c. 50,000 residential units. This means that the price and rent increase in 2017 was not exclusively due to Brexit speculation. The market will likely remain tight for years to come.

  • In Hamburg, prices for existing apartments have risen more than 70% since 2009. Compared to other metropolitan areas, rent growth is below the average. It is dampened by comparatively strong construction activity and a stable population. This suggests that the low interest rate level is probably the main reason behind the uptrend in apartment and house prices. Hamburg’s property market might therefore be more sensitive to interest rate changes than that of other metropolitan areas. Since our baseline scenario for 2018 foresees only small increases in mortgage rates, house and apartment prices in Hamburg will probably continue to rise strongly this year.

  • The market in Düsseldorf might be as rate-sensitive as its Hamburg counterpart. Since 2009, the population has grown “only” 5%. And other demand drivers were less dynamic than in other German cities, too. Price and rent growth have tended to be (below the) average. Nevertheless, prices and rents look set to rise again in 2018.

  • Stuttgart’s population is slow to grow. Since 2009, it has risen only about 6%. The city’s location in a basin restricts construction activity in the long term. Still, its excellent economic structure and dynamic labour market are driving prices upwards. Prices for existing apartments have risen more than 100% since 2009 and 14% in 2017 alone. Rents for re-let apartments have risen 63% since 2009 and c. 12% in 2017. As the labour market boom is likely to continue, demand and, consequently, prices and rents will probably rise further in the coming years.

(Resource: Deutsche Bank Research)