Recent Supply and Demand Developments in the German Housing Market

Until about 2010, price developments in German regional housing markets were by and large in line with economic performance. By contrast, over the last six years, price developments have been increasingly driven by supply shortages and surging demand, particularly in large cities. On top of that, around 890,000 asylum seekers arrived in Germany in 2015. This led to an increase in population of 1 % and suggests an increase in demand for low-price housing in the short- to medium-term, resulting in potential upward price pressures for the real estate market. This Economic Brief assesses whether the recent trend of rising prices constitutes a risk to financial stability in Germany and whether the high influx of refugees might affect price developments. Firstly, recent data suggests that in spite of noticeable increases in regional house prices in recent years, the housing sector does not pose a risk to financial stability in Germany. Secondly, over the medium-term, the inflow of asylum seekers is likely to have only limited effects on the rate of housing inflation. However, aggregate figures mask regional (urban-rural, East-West) differences in housing-market dynamics, and a prolonged period of zero or even negative real interest rates could theoretically trigger a misallocation of resources with negative rebound effects for the real economy once interest rates normalise. Also, high net-immigration followed by net-emigration poses significant demand and supply-management challenges for the (social) housing market.