Real Estate

Germany’s hot property market may be cooling off

Mietwohnungen in Muenchen
Life in the big city. Source: picture alliance / Sven Simon

Germany’s residential property boom may be drawing to a close, at least in some of the hot markets like Munich, Berlin and Stuttgart. Prices in those three cities may even decline by as much as a fourth or a third over the next five years.

These are among the forecasts made by the so-called “Council of Real Estate Wise Men” at the German Property Federation (ZIA) in the analysis they publish at the beginning of each year. “The time of turbulent demand in Munich, Berlin and Stuttgart has come to an end,” said Harald Simons, head of the Empirica research group and the member of the council overlooking residential real estate.

Nonetheless, both the council and other experts expect the residential market to be uneven across the country as construction continues apace and longer term projects get finished. The prospect of rising interest rates, political uncertainty and a decline in immigration are all factors that may dampen demand. Experts also fault some of the policies planned by Germany’s new coalition government as unhelpful or even counterproductive.

“A shortage of office space is a dangerous signal.”

Andreas Schulten, Council of Real Estate Wise Men

In the meantime, however, lagging construction of office space may be reaching critical proportions as virtually full occupancy creates shortages, the experts fear. Andreas Schulten, head of the Bulwiengesa research group and commercial property analyst for the council, spoke of a “striking lack of construction in the office sector.” He warned this could slow growth in some cities as companies postpone or relocate activity. “From an economic perspective, a shortage of office space is a dangerous signal,” he said.

New office construction fell by 320,000 square meters to 1.6 million square meters in 2017 in the 127 markets analyzed. The vacancy rate fell for the seventh year in a row, to 1.9 percent in Munich and 2.4 percent in Berlin, for instance. The focus of government policy on residential real estate may in fact be to the detriment of commercial construction.

The residential supply will show a strong increase this year, reflecting the high volume of building permits granted in recent years. About 300,000 residences were completed in 2017 and there should be even more this year. In Berlin, in particular, some 18,700 properties will be completed, compared with 13,700 in 2016 and just 8,700 in 2014.

The outlook is mixed for some other big cities, like Hamburg, Cologne and Düsseldorf. Developments in Frankfurt will depend on Brexit. Overall, the German Economic Institute in Cologne estimates the shortfall in residential housing at 400,000 units. There is still a shortage in many places and price segments, mortgage bank Berlin Hyp said in its 2018 report on that metropolitan area. As a result, it added, home prices will continue to rise.

The president of ZIA, Andreas Mattner, agreed. “Last year showed that even in cities like Berlin and Munich the party is not over,” he said. “But a certain stability has returned.” His concern was that the long haggling over a new coalition had hurt the overall economy and that some policies marked a return to inhibiting regulations.

The coalition agreement between Chancellor Angela’s Merkel’s Christian Democrats and the Social Democrats aims for 1.5 million new residences over the next four years, an ambitious 375,000 a year. The government is ready to put in €2 billion to subsidize low-cost housing.

But the council of wise men criticized the government for impeding housing growth by constantly adding new regulations and requirements. Already in 2015, it was estimated that energy regulations, parking place requirements and other local building standards had increased construction costs by 30 percent. Council chairman Lars Feld, an economist at University of Freiburg, called for a reduction or optimization of regulation.

He also criticized the coalition’s plans to subsidize the purchase price for families with children through tax exemptions. It is a needless complication on tax returns and won’t spur construction. Rather it will simply result in higher prices for other buyers because builders will simply include it in their pricing.

The housing lobby GdW meanwhile called Tuesday for a new parliamentary committee specifically devoted to real estate issues. Housing policy in the new government is to be handled by the Interior Ministry instead of the Environment Ministry as before. But, the group argued, the Interior committee in parliament already has numerous serious issues to deal with and, given its central importance in quality of life, housing deserves to have its own committee.

Silke Kersting covers housing policy for Handelsblatt in Berlin. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author:

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