Weaker upward pressure on prices in the housing market

Graphic for selected price indices of housing

The prices of apartments and houses in Germany continue to rise. According to the Deutsche Bundesbank's current Monthly Report, prices in German cities increased by an average of 5¼% in 2014. The average rate of inflation has therefore decreased significantly for the first time since the upturn in the housing market, the Bundesbank economists report. In the previous years, prices for residential property had increased at a considerably higher rate. In 2013, they rose by an average of 7¼%.

Property buyers have had to dig deep into their own pockets in recent years, especially for residential properties in urban areas, where prices increased by approximately 10% per year from 2010 to 2013. As the Bundesbank economists note, the calming in the urban housing markets is also reflected in rents, which rose more moderately than in the previous year. The weaker inflationary pressures have also led to a slight closing of the gulf between real estate in rural and urban areas and between different types of property.

High demand for residential property

Bundesbank economists partly attribute the more subdued price rises in some regions to the weaker demand that has resulted from already elevated prices levels. Furthermore, last year there was a significantly greater supply of housing, which dampened the upward pressure on prices. According to the report, it is likely that considerably more dwellings were completed in 2014 than in 2013.

Nevertheless, the interest in buying residential property in Germany remains high. The Bundesbank's economists cite the good income and employment prospects of households as reasons for this. In the light of low interest rates for loans, potential buyers of residential property are also benefiting from favourable borrowing conditions. The average interest rate on mortgage loans was 2 percentage points lower in 2014 than in 2009. The substantial inflow of immigrants is also ensuring that demand for housing remains high.

Bundesbank economists do not currently see a danger of real estate bubbles developing. In their estimation, the price level for residential properties is not too high on the whole. According to the report, there are still no signs of a substantial overvaluation of housing for Germany as a whole. Major cities constitute an exception, where prices are between 10% and 20% higher than would be suggested on the basis of economic and demographic developments.