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The German housing market in 2018

June 4th 2018

By The Deutsche Bank AG

Price and rent outlook for Berlin and Frankfurt.

Metropolitan areas in Germany are booming. The current real-estate cycle started in 2009 and has led to significant price increases for residential property in many cities. Prices for apartments have as much as doubled in some cities. Strong population and employment growth and declining unemployment rates are driving demand, and supply elasticity is low. New construction is slow to pick up, and vacancy rates are declining. As a result, rent growth is accelerating. Regulatory measures are unlikely to provide sufficient relief. House prices and rents look set to rise markedly in 2018.

Data from a number of cities confirm that demand is high and supply insufficient. In Munich, the vacancy rate is near zero. In Berlin, employment increased by c. 4% in 2017. Frankfurt was already 40,000 residential units short in 2015 – which suggests that 2017’s 15% yoy apartment price increase was not just Brexit-related. 

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.

Berlin: Sluggish new supply suggests a long cycle

Prices for existing terraced houses and single family homes in Berlin were up almost 10% yoy in 2017 according to riwis. Despite this jump, which considerably exceeded the uptrend in most other major metropolitan areas, house prices in Berlin are still relatively low. It is still true that one single-family home in Munich costs as much as three houses in Berlin and that terraced houses and apartments are almost twice as expensive in Munich as in Berlin. According to Numbeo, sqm prices outside the city centre came in at EUR 3,200 at the end of 2017 and rose c. 10% yoy. In Berlin, too, the price uptrend is due to a major shortfall of residential units.

The small number of construction plots is often mentioned as one of the main reasons for the lack of homes. According to the most recent residential market barometer for Berlin, the shortage is most visible in the medium and, in particular, the lower price segment. Moreover, the market is expected remain tight until the end of the decade.

Official completion plans are unlikely to provide relief either. In 2016 (latest available figures), only 13,700 residential units were completed, i.e. 0.7% of the total number of existing homes. According to official statistics, the gap between construction permits and completions remained high, as in the last few years. While 25,100 building permits were issued, only 13,700 units were completed. The gap between permits and completions is larger than in any other major German city; the ratio is 1.83 in Berlin, compared to 1.78 in Düsseldorf, 1.4 in Hamburg, 1.3 in Frankfurt and Munich and 1.2 in Cologne and Stuttgart. Between 2011 and 2015 (latest available figures), Berlin’s population increased by 200,000 and the number of households by c. 125,000. Robust demand is not least due to favourable labour market trends. Employment growth came in at c. 4% in 2016 and continued at the same pace in 2017. This is quite impressive; aggregate employment growth since 2009 amounts to almost 30%.

As a result, unemployment has been declining for years, to 8.4% in December 2017 – a rate last seen in 1984. Economic growth in Berlin looks set to remain strong, which means that the city will probably attract more than 250,000 new citizens by 2030. For years to come, a steady rise in demand for housing will meet with inelastic supply.

As the ownership rate is particularly low in Berlin (15.6% according to the census of 2011, compared to more than 20% in other metropolitan areas and 45.9% in Germany as a whole), many tenants may want to acquire their own homes. Strong rent growth will reinforce incentives during the cycle. In 2017, rent growth accelerated again, to 11% yoy (2016: 7%; 2015: 2½%). Numerous factors point to a super cycle in Berlin, which might last far beyond 2020. In the course of this development, Berlin might become one of the most expensive metropolitan areas or at least cities in Germany (it is currently ranked 15th in terms of existing home prices). This forecast is supported by dynamic price growth in the past three years. Existing home prices in Berlin were up c. 36%, compared to 30% in other metropolitan areas.

Home prices in Frankfurt rose 15% in 2017

By mid-2017, 736,200 people lived in Frankfurt, i.e. 64,300 (~9%) more than in 2009. The population looks set to grow further in the coming years. The city administration currently expects the number of inhabitants to rise to more than 750,000 by the end of 2018.

By the end of 2027, more than 800,000 people are likely to live in Frankfurt. As the population has grown and economic activity has accelerated, the number of employees has risen as well, by c. 15% since 2009. Compared to other German metropolitan areas, the rate of unemployment is low (overall: 5.6%; among foreigners: 10.5%3; youth employment: 5.6%; the averages for all metropolitan areas are 6.3%, 13.8% and 5.0%, respectively). In particular, unemployment among foreigners is relatively low and below the nationwide average of 13.7% (as of October 2017). Migrants in Frankfurt appear to be highly educated – which may explain the relatively high and rising share of university graduates among employees in Frankfurt.

In 2017, c. 27% of all regular employees in jobs which are subject to social security contributions were graduates. Strong population and employment growth has stimulated housing demand. Low interest rates, healthy income growth and relatively low prices per sqm at the beginning of the current cycle have propped up demand as well. The number of building permits granted per year has therefore risen from 2,400 residential units in 2009 to 5,600 in 2016. However, according to bulwiengesa, the number of completions has increased much more slowly and amounted to only just above 4,000 residential units in the last few years.

At the same time, conversions of public buildings and commercial space have helped to create several thousands of residential units in the last few years. New city quarters have been built or planned, for example a new quarter for up to 30,000 people in the north-west of the city at the border of the Taunus. While these efforts have helped to keep the gap between supply and demand unchanged, they have not narrowed it. There are numerous reasons for the low supply price elasticity in Frankfurt. Above all, there is a shortage of construction plots. The city already stretches to its borders. Moreover, large-scale construction projects take time and are the subject of controversial discussions, just as in other cities.

Limited construction activity has led to a significant shortage of residential units, defined as the number of households in relation to the number of available residential units. According to the city’s latest official figures, the deficit amounted to c. 40,000 residential units in 2015, i.e. more than 10,000 more than in 2014. In 2016 and 2017, the gap probably widened, to c. 50,000 residential units. And it will take far into the coming decade to reduce the demand overhang. In line with this market situation, prices for existing apartments and terraced houses rose 68% and 60%, respectively, between 2009 and 2017. Until the Brexit summer of 2016, the uptrend in prices was relatively subdued. However, this is no longer the case. In 2017, prices for existing and new apartments were up 15% and almost 17% yoy, respectively. Rents for re-let apartments also rose strongly, by 8%. These jumps might to some extent be due to the expectation that numerous jobs will be shifted from London to Frankfurt. However, there is considerable uncertainty about how many jobs will be moved in the end (there has been speculation about more than 10,000 additional jobs). As a result, landlords and sellers have more pricing power in a market where demand is high. We believe that the estimate of more than 10,000 new jobs is overly optimistic for two reasons.

First, ex-Prime Minister Tony Blair recently called upon his Labour Party to try to work against Brexit and towards a referendum about the result of the negotiations with the EU. The “Brexit effect” might therefore be much smaller than assumed today, not least because several British politicians are urging the UK to remain within the EU single market despite Brexit. Second, a Financial Times article written in December 2017 suggests that the banks will shift fewer than 4,600 jobs from London to Frankfurt due to Brexit. Based on this range of scenarios and data, we believe that our Brexit analysis of 2016 (in which we assume in our baseline scenario that 5,000 additional employees move to Frankfurt) is still realistic.