From the Bundesbank’s perspective, owner-occupied apartments and houses in German towns and cities are clearly too expensive. "In urban areas, the prices of housing continue to be well above the level that would appear justified in terms of the longer-term economic and demographic determinants," write the Bundesbank’s experts in the latest Monthly Report. They estimate that these price exaggerations stood at between 15% and 30% in 2017. Housing in the big cities (Berlin, Düsseldorf, Hamburg, Frankfurt am Main, Cologne, Munich and Stuttgart) is even more overpriced. Price deviations there are likely to have increased further and now stand at 35%, it says in the Monthly Report.

Residential housing was already becoming more expensive in Germany during the past few years. This development continued in 2017, although there was no further increase in the rate of price inflation, which has been quite high for some time, write the Bundesbank’s economists. While the prices of housing in towns and cities rose at a more or less undiminished pace, the rate of price increase slowed down somewhat in Germany as a whole. Unlike in previous years, interest rates did not decline further last year, which meant that they did not contribute to an additional surge in demand. Moreover, there is likely to have been a marked additional expansion of the housing supply in 2017, according to the Monthly Report.

Upward price pressure in towns and cities continues

In German towns and cities overall, however, there was no easing of the upward pressure on the prices of housing. According to Bundesbank figures based on data from bulwiengesa AG, residential property prices in urban areas in Germany continued to increase sharply by around 9%. Price inflation was thus even somewhat stronger than in the three preceding years, when prices went up by an average of 7½%. In Germany’s seven biggest cities, housing inflation slowed down by 1¾ percentage points to 9¼%. Even so, the rate was above the average for the three preceding years, the Monthly Report notes.

The results for the towns and cities indicate that the demand for urban housing – not least in view of the extremely high price levels in the big cities – has been continuing to focus on locations outside the major cities that have been in high demand up to now. "Given the somewhat more moderate price dynamics in Germany overall, urban centres appear to have gained in popularity in comparison with rural areas," write the Bank’s economists.

There was also an increase in rents in new contracts in these urban areas. According to the Monthly Report, they went up by 7¼%. The increases in rents were even higher in the big cities, where rents for new lettings of existing dwellings were raised by 9¼% compared with the previous year. "Rent inflation in the reporting year reached its highest level since the start of the current boom in the housing market," the economists write.

High cost of expanding available land is the main constraint

There was also a marked increase in the housing supply last year. The Bundesbank estimates that it was markedly larger than in 2016, when some 278,000 units were completed. The number of planned housing units, on the other hand, declined last year for the first time since the start of the housing market boom. At an estimated number of around 345,000 units, roughly 7½% fewer permits were granted than in 2016, states the Monthly Report. Nevertheless, 2016 had seen an extremely sharp rise of more than 20% due to special factors, such as anticipatory effects regarding construction permits in connection with more stringent energy standards for new residential buildings.

In the view of the Bundesbank’s economists, the high cost of expanding available land still represents the main constraint on an expansion of housing. According to provisional data of the Federal Statistical Office, the prices of building plots went up by around 12% in the first half of 2017. According to the Monthly Report, this rate of increase in 2016 was already markedly higher than the average annual dynamics of the period from 2010 to 2015.