Market analysis: Prices in Germany’s housing and office property markets are set to continue rising for the time being

  • Housing: Rental markets still tense despite stronger new construction activity
  • Offices: Vacancy rates recede further in the flourishing property markets

Published today, the latest vdp analysis of the German property market shows that the brisk demand for residential and office properties continues to set the tone of the market. New construction in the housing and office property segments provided hardly any relief last year.

Housing market

The vdp property price index for single- and two-family houses rose by 8.2% in 2018, while prices for condominiums went up by 5.8%. This growth was attributable not only to rising incomes and low interest rates but also to the high degree of reticence to sell in the markets for existing properties. Thus, the number of transactions has stagnated for a number of years now, whereas purchase prices have increased significantly.  

Dr. Franz Eilers, Head of Market Research at vdpResearch:

“There are no clear-cut reasons to explain this reticence to sell. Given the sharp increase in prices, owner-occupiers often remain in their own four walls due to a lack of alternative offerings, particularly in regions where demand is high. This applies both to the rental market and to the property ownership market. And also for those who consider their property as an asset, there are good reasons to keep the property in their investment portfolio given the absence of alternative investment opportunities.”

Housing market tensions are currently driving rents up, and the low interest rates are fueling strong demand among people wishing to buy their own home as the focal point of their life and as an investment. An easing of the market situation is not to be expected in the short term, as only a very slow increase in supply in the housing market is possible.

“That is problematic, above all, for persons who have to move or are seeking a home in a region where demand is high. For everyone else – which is to say the vast majority of the population – this development will only impact on existing rents with a time lag,”

commented Eilers. As long as interest rates remain at their current levels, Eilers believes that price growth, given the expected economic developments, will lose momentum and that prices will rise to the same extent as rents.    

Office property market

The buoyant development in employment gave rise to strong letting performance levels in the office property market in 2018. Since, at the same time, less new office space was created than could have been let, vacancy rates dropped once again. At the end of 2018, less than 5% of available office space in all of Germany was unoccupied, and in the country’s seven largest office property markets, the weighted vacancy rate stood at only around 3% as an average for 2018. In the flourishing urban concentrations there is therefore virtually no longer any supply in the market for office properties. Office rents in 2018 again climbed considerably as a result, and will continue on their upward trajectory in 2019 – even if the economic stimulus to demand proves to be weaker in the months ahead.

While vacancy rates fell and rents rose, interest rates remained low and the demand among institutional investors for office properties persisted. This caused initial yields to fall and capital values to rise. Just how long this development will continue remains to be seen. Eilers expects that the cash flow generated by office properties will be higher in the current year than last year. Seen in connection with the low level of interest rates, this points to stable demand for investment properties in the market for offices for the time being.

“However, it is impossible to estimate how long interest rates will stay low. And we have no experience of the effect of persistently low interest rates on the behavior of office property market investors,”

said Eilers. On the whole, investors were more cautious of late – the pace at which initial yields decreased slowed down somewhat.

About the author of the market analysis

Dr. Franz Eilers is head of market research at vdpResearch, the independent real estate analysis firm of the Association of German Pfandbrief Banks (vdp). Before joining vdpResearch, Eilers was in charge of the real estate market research department in the central division Valuation and Consulting at HypoVereinsbank. Eilers conducts regular analyses of the latest real estate market developments for the vdp. Moreover, he and his team are responsible for compiling the vdp property price index, which the Deutsche Bundesbank uses within the scope of its property price monitoring activities.

About the Association of German Pfandbrief Banks (vdp)

The Association of German Pfandbrief Banks (vdp) is one of the five central associations of the German banking industry. The vdp represents the sector’s most important finance providers for residential and commercial construction as well as for general government and its institutions.