Real estate values in Germany are inflating excessively, suggesting a potential bubble.

In a recent analysis by 21st Real Estate, it has been revealed that the German real estate market is experiencing a significant shift, with several cities and communities showing signs of price bubbles.

The office real estate market, in particular, has been affected by an 8.7 percent increase, while the retail real estate market has seen a more modest 1.6 percent rise. However, it is the residential market that has been most affected, with 20.3 percent of all examined cities and communities identified as overheated.

Major urban centers like Berlin, Munich, Frankfurt, Hamburg, and some surrounding metropolitan areas have seen an increased risk of price bubbles in residential, office, and retail real estate markets since the second quarter of 2021. Interestingly, Düsseldorf is the only German metropolis with a price bubble in the office segment.

In contrast, none of the seven A-cities show signs of overheating in the retail real estate market. Five of the seven A-cities, however, have an increased risk of a price bubble: Düsseldorf, Hamburg, Cologne, Munich, and Stuttgart.

The risk of a price bubble was determined by investigating whether sales prices have explosively decoupled from rents. 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.

In Hamburg, the risk of price distortions in the office segment has recently decreased significantly. The calculation is based on quarterly index series of sales prices and rents for residential, office, and retail properties in 11,006 German cities and communities. The indices 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 overall proportion of German cities and communities at risk of overheating has increased significantly since the outbreak of the coronavirus pandemic in mid-2020, from 2.9% in the third quarter of 2020 to 8.7% in the second quarter of 2021.

The analysts from Berlin concluded that price bubbles exist in all three areas, with the residential market being the most affected. For a comprehensive look at the analysis, you can visit this link.