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Germany's residential property market presents a deceptive picture of stability. While headline price growth has moderated to seemingly manageable levels—condominiums rising just 0.7% quarter-on-quarter in Q2 2025—the underlying fundamentals tell a more troubling story. Some 328 of Germany's 400 districts remain at risk of a property bubble, a figure that has barely shifted despite three years of market adjustment since the 2022 peaks.
The data comes from the latest German Real Estate Index (GREIX) and Empirica's bubble index for Q2 2025, both tracking transaction prices and fundamental valuations across German markets. Rather than the healthy correction many expected, the evidence points to a market trapped between insufficient price declines and persistent structural imbalances that could take years to resolve.
The apparent calm masks significant regional divergences and ongoing valuation distortions. In Germany's seven largest cities, purchase prices maintain a 30% premium over sustainable rent-based valuations—down from a peak of 48% in 2022, but essentially unchanged for six consecutive quarters. This stagnation suggests the market has reached an uncomfortable equilibrium where prices haven't fallen enough to restore fundamentals, yet lack the income support to justify current levels.
"Purchase prices have risen faster than rents for a long time, causing real estate to move away from a sustainable valuation," observes Dr. Reiner Braun, CEO of Empirica. "The stronger the momentum of rents relative to purchase prices, the lower the risk of bubbles bursting." Yet this convergence has stalled precisely where it matters most—in the metropolitan areas that drive institutional investment decisions.
The most striking evidence of persistent imbalance comes from Leipzig, which has already surpassed its 2022 price peaks with a 2.9% quarterly gain in Q2 2025. This performance stands in stark contrast to other major cities, where prices remain 10-15% below previous highs. Munich, Hamburg and Stuttgart show gaps exceeding 15%, while even Germany's financial capital Frankfurt lags significantly behind historical levels.
"The level of prices per square metre is still relatively low in Leipzig. There is therefore still a lot of upside potential, which is now clearly being exploited," explains Jonas Zdrzalek, real estate market expert at the Kiel Institute for the World Economy, which helps compile the GREIX index. Yet this rapid appreciation in a secondary market, while established centres stagnate, suggests fundamental pricing mechanisms remain distorted.
The regional picture reveals additional stress points. North Rhine-Westphalia districts like Mettmann recorded 5.4% quarterly gains, while Rhein-Erft climbed 3%—both substantially above national averages. These localised spikes occur against a backdrop where transaction volumes are increasing: multi-family home sales rose 25% year-on-year, condominiums 16%, and single-family homes 9%.
However, Zdrzalek cautions against interpreting increased activity as market health. "We cannot yet speak of a boom. The increase in property values, especially when adjusted for inflation, is likely to be strongly influenced by individual factors at present and is not driven by a general boom."
The Empirica bubble index provides the most comprehensive view of persistent risk. Among Germany's twelve largest cities, only Essen registers "moderate" bubble risk. Dortmund and Munich face "high" risk, while Berlin, Bremen, Düsseldorf, Frankfurt, Hamburg, Cologne, Dresden and Leipzig all carry "rather high" bubble risk classifications.
More concerning is the resistance to improvement. The proportion of districts where rents and purchase prices have decoupled—286 of 400—has decreased only marginally from its 2022 peak of 332. Similarly, 334 districts still show purchase prices outstripping local incomes, barely changed from the 365 recorded at the market peak.
The potential for price setbacks—Empirica's measure of how far prices could fall to reach sustainable levels—stands at 18% nationally. While this represents improvement from the 32% recorded in Q2 2022, the rate of convergence has slowed dramatically. At current trends, GREIX calculations suggest condominium prices won't reach new highs until early 2029, requiring 15 quarters of sustained growth.
"The current trend reflects the expectation that housing will remain scarce, mainly because new construction has collapsed," Braun notes. Yet he warns this scarcity narrative may prove temporary. "If there are no new waves of immigration from abroad, the rise in demand could already start to slow down in a few years. This could put relative prices under pressure again, especially in less sought-after properties and less attractive locations."
For institutional investors, the implications are stark. Rather than the clean recovery story many anticipated, German residential markets remain structurally vulnerable to external shocks. The persistence of bubble risk across 82% of German districts, combined with stagnant fundamentals in major metropolitan areas, suggests the market correction remains incomplete. While opportunities exist in markets like Leipzig showing genuine momentum, the broader landscape still rewards caution over conviction.
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