The prices for residential real estate in Germany are rising at record speed.

In the third quarter, apartments and houses increased in price by an average of 12 percent compared to the same period last year, the Federal Statistical Office announced on Wednesday.

This is the largest price increase since the time series began in 2000. Prices are skyrocketing not only in large cities, but also in rural areas.

The Wiesbaden statisticians had already calculated an increase of 10.8 percent in the second quarter - this increase has now been exceeded despite the Corona crisis.

The Federal Office noted an increase of 14.5 percent for houses and apartments in the seven largest cities of Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf.

But prices also rose rapidly in sparsely populated rural districts: there, one and two-family houses were up 15.5 percent compared to the same quarter of the previous year and condominiums by 11.2 percent.

In more densely populated rural districts, apartment and house prices also rose sharply: single and two-family houses cost an average of 12 percent more than in the same quarter of the previous year and condominiums 12.3 percent.

There are many reasons for the rapidly rising prices (listed in detail in this “quick-smart text”).

Essentially, low interest rates, a clear excess demand, a lack of investment alternatives, especially for large investors, and a robust economy have been driving the real estate boom for more than ten years.

At the same time, expensive materials such as wood, cement and steel as well as insufficient capacities in the construction industry are driving up prices.

In addition, with the pandemic and the trend towards home offices, real estate is also increasingly in demand in rural areas.

Price bubble warnings

After more than a decade of rising prices, the DIW now believes major “price corrections” in Berlin, Munich, Hamburg, but also in other large cities and university cities are possible in the coming years. There could be falling but also stagnating prices, according to study author Konstantin Kholodilin. The speculative exaggerations would increase. Condominiums and building plots in large cities are particularly affected.

“There are increasing signs that housing prices in some cities and market segments can no longer be explained solely by the development of rents and low interest rates,” says Kholodilin. “In the next few years there may be price corrections there, in other words the bursting of property price bubbles.” However, experience in other countries shows that even after a bubble has burst, prices do not fall as low as they were before.

The DIW evaluated data from the 114 largest German cities. Purchase prices for home ownership rose by nine percent this year, while rents grew by about half as much. The trend of the ten previous years thus continued. The increasing divergence points to speculative bubbles. However, the risk of a nationwide real estate bubble is manageable. Overall, houses are solidly financed. Nor does it indicate any threat to financial stability.

In the past three years, however, there have been frequent warnings of allegedly or actually high prices and soon bursting real estate bubbles.

But at least so far, prices have continued to rise.

The Bundesbank has also been warning of overheating for years.

“According to our calculations, the prices of residential properties are 10 to 30 percent above the value that is justified by fundamentals.

We are increasingly seeing this outside of the metropolitan areas, too, ”said Vice President Claudia Buch as recently as November.