Expansion in the German property sector continues unabated.
In a recent investigation, 21st Real Estate, a provider of web-based software solutions, delved into the risk of price bubbles in the residential, office, and retail asset classes across Germany. The analysis, which can be found at https://www.21re.de/market-reports, was based on quarterly index series of sales prices and rents for properties in 11,006 German cities and communities.
The findings reveal a notable increase in the risk of a price bubble in the German residential market, particularly in top-tier (A) cities like Berlin, Frankfurt, and Munich, driven by demand-supply imbalances and low financing costs. In fact, 20.3 percent of all examined cities and communities have been identified as overheated in the residential real estate market. The proportion of German cities and communities at risk of forming a price bubble in the residential market has increased from around 5% in 2017 to over 20% in the second quarter of 2021.
However, the office and retail segments show more heterogeneous risk. While residential prices surged, the office and retail sectors have faced different dynamics. The office market is affected by 8.7 percent, and the retail real estate market by 1.6 percent. Interestingly, Düsseldorf is the only German metropolis with a price bubble in the office segment.
In the retail real estate market, none of the seven A-cities show signs of overheating, but B and other cities and communities have seen a sharp increase in the risk of a price bubble in the second quarter of 2021. Contrarily, in B and C-cities, the risk of a bubble has decreased since mid-2020, while in other cities and communities, it has continued to increase.
The risk of a price bubble was determined by investigating whether sales prices have explosively decoupled from rents. Five of the seven A-cities have an increased risk of a price bubble in the residential market: Düsseldorf, Hamburg, Cologne, Munich, and Stuttgart. In Hamburg, the risk of price distortions in the office segment has recently decreased significantly.
The indices used in the analysis are based on 8,473,788 different supply observations and cover the period from the first quarter of 2011 to the second quarter of 2021. The investigation was conducted by analysts from Berlin.
While this analysis provides valuable insights into the current state of the German real estate market, it's important to note that a more detailed quantitative analysis or recent market reports breaking down bubble risks by segment and city classification may be necessary for a comprehensive understanding. Consulting specialized German real estate market research from institutions like Bulwiengesa, PwC Germany, or local housing agencies could prove beneficial.
