Despite the coronavirus pandemic, there are no signs of an abrupt correction in house prices in Germany, according to the Bundesbank’s assessment. However, this is contingent on the economic recovery not being “seriously” disrupted. According to the Bundesbank’s Monthly Report, the pandemic has so far left little mark on the housing market. As the Bundesbank’s experts point out, developments in residential real-estate prices have been robust so far during the coronavirus crisis, and, in particular, there have been no signs of a slowdown yet.

House prices rising further

According to data provided by the Association of German Pfandbrief banks (Verband deutscher Pfandbriefbanken, vdp), residential property prices rose by 6.8% in the second quarter of 2020 compared with the same period in the previous year, and were thus no weaker than in the previous year. In 2019, prices rose somewhat less sharply than in previous years. According to vdp data, prices increased by 4.6% in the seven biggest cities in the second quarter, which is a somewhat higher rate than the same quarter of the previous year. However, as in 2019, this was already at a much lower level than in previous years.

Although the number of building permits in Germany had more or less stagnated at the start of the pandemic, a clear increase could already be observed in May. As the authors of the report note, the number of building permits in the period from March to August exceeded the figure seen in the same period of the previous year. New orders in housing construction had also recently returned to their pre-crisis levels following a slump in March and April.

Signs of weaker demand for residential real estate

In their article, the experts do not rule out the possibility that demand for residential real estate may have eased somewhat. They report that households' disposable income stagnated in the second quarter and that uncertainty remains high, which could signal weaker demand for housing. “Although financing conditions remain exceedingly favourable, the affordability of credit-financed purchases of residential property is likely to have deteriorated on average given the ongoing upward pressure on prices,” the report states. If, however, the weaker income trend proves only temporary, demand for housing is likely to change only marginally. Moreover, residential real estate is likely to remain an attractive investment option in the low interest rate environment.

House price inflation driven by economic upturn in recent years

The report also examines why house prices have been rising since 2010. According to the Bundesbank, this is mainly the result of the upturn in the German economy. Higher demand for houses has, according to the article, also driven prices for construction services up significantly. “Land prices, whose contribution to house price inflation has risen significantly in recent years, appreciated even more sharply,” they report.

Little difference in price dynamics between urban and rural areas

In addition, the rise in house prices was, until 2015, limited to urban areas, the report explains. Since 2015, the strong house price inflation has also spilled over to rural areas. “In 2019, there were hardly any remaining differences in price dynamics between urban and rural areas”, the economists write. According to Bundesbank calculations based on data provided by bulwiengesa AG, house prices in Germany rose by 4¼% overall up until 2015 before then appreciating by 7¾% in the 2015 to 2019 period. In terms of rent inflation, there was likewise hardly any regional disparity remaining last year. “However, the magnitude of the increases in house prices was significantly higher than that of increases in prices for new rental contracts,” the experts note.