Germany’s 10-year-old residential property boom shows no signs of slowing down in the short term as construction capacity still lags behind demand for new residences, especially in metropolitan areas.
But even in the longer term, it is far from certain when the market can reach equilibrium, let alone when the real estate bubble might pop and send prices plunging. There have been some signs that the German market for office space and other commercial property may have hit a peak.
For the moment, the upward pressure continues in the market for houses and apartments. Commercial investment in residential housing last year was €17.6 billion ($20.1 billion), the second-highest amount ever after €23.5 billion in 2015.
A survey of 300 investors and contractors by consulting firm EY found two-thirds expect prices to rise further in big cities, even though state-owned home lender KfW estimates prices are at a premium of 22 to 44 percent over their real values in these locations.
Government intervention to alleviate the growing problem in affordable housing isn’t helping, market participants complain. Rent controls, low-income housing quotas, and, most recently, a limit on rent increases after modernization – none of these ease tension in the market, says Christian Schulz-Wulkow at EY. “Only new construction can remedy the situation,” he says.
But the construction industry is working at capacity and bottlenecks lead 98 percent of those in the EY survey to reckon with higher building costs.
Surely demographics will come to the rescue, one might think, as Germany faces a declining population. Demand will collapse and home prices will plunge, no? So one might think just looking at population forecasts.
“But that’s all nonsense,” says Bernd Raffelhüschen at the University of Freiburg. “Because demand for real estate doesn’t depend on individuals, but on households.”
And here the trend in Germany is for households to get smaller. In 1961, 2.77 people lived in a household on average. By 2015, that was 1.99 and in 2060, it will be 1.86. In short, there will be fewer people but more households.
There are more divorces and fewer marriages and ultimately a lot more people preferring to live as singles. In addition, people are living longer, pushing up the per capita demand for housing even further. Assuming there will be 200,000 immigrants into Germany each year, a study co-authored by Raffelhüschen doesn’t see a return to 2015 household levels until 2060.
The long-term development will be uneven, however, as the East-West divide continues to play a role. In the former West Germany, the number of households could increase by 2 percent by 2060, the study says. In the former East Germany, outside Berlin, their number would decline by 10 percent.
The German Institute for Economic Research DIW in Berlin has forecast that this trend would impact prices in a polarizing fashion, with homeownership gaining in value in some regions and losing in others. The market price for condos could fall by up to 25 percent in one-third of localities by 2030, and in one-fourth for one- and two-family houses. On top of that is a growing gap between urban residential property and rural, with rural homes in eastern Germany being hardest hit.
One certainty in all these forecasts is that if construction activity could keep up with shifting demand, there wouldn’t be higher prices anywhere. The reality is, there is just not enough construction in the big metropolitan areas.
Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Matthias Streit is a financial reporter. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the authors: [email protected] and [email protected]