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How the housing bubble in Frankfurt and Munich could be set to burst

Imogen Goodman
Imogen Goodman - [email protected]
How the housing bubble in Frankfurt and Munich could be set to burst
Dark clouds over Frankfurt's banking quarter. Photo: picture alliance/dpa | Frank Rumpenhorst

Frankfurt and Munich are among the cities with the highest risk of a housing bubble worldwide, a new study has revealed.


According to the UBS Global Real Estate Bubble Index, Frankfurt is second only to Toronto in terms of its risk of suffering a major decline in property prices. In Munich, too - one of Germany's priciest cities - the housing market could be dramatically overheated.

In a list of 25 global cities facing a housing bubble, Frankfurt landed in second place with a value of 2.21 and Munich was in fourth place with a value of 1.80. Values of more than 1.50 represent a housing-bubble risk, the Swiss bank revealed.

"Investors considering purchases in these regions of Germany for yield considerations should exercise caution at present," advised Maximilian Kunkel, UBS chief investment strategist in Germany.

READ ALSO: Why Germany’s property boom could be coming to an end


In the cities analysed, house prices grew by an average of 10 percent between mid-2021 and mid-2022. However, researchers believe the pace of growth is out of step with current economic realities.

For a long time, a combination of urbanisation - people increasingly moving to cities - and low financing costs have made it easier for people to purchase homes. 

The low interest rates have meant that house prices have steadily decoupled from local incomes and rents over the past decade, UBS said.

"The cities with the highest bubble risk have seen inflation-adjusted price increases averaging 60 percent over this period, while real incomes and rents have only risen by about 12 percent," the researchers explained. 

But interest rate rises to combat inflation and increased economic uncertainty could soon lead to a reversal of this trend. 

"Imbalances in global metropolitan housing markets are highly elevated and prices are out of sync with rising interest rates," said the report.

Mortgage rates have almost doubled in most of the cities analysed since mid-2021, reducing the amount of living space potentially buyers can afford.

According to UBS, a skilled service worker can now only afford around 50 square metres of living space on average - around a third lower than what they could have purchased a year ago.

In Munich, this trend is particularly severe: a skilled service worker can afford one bedroom fewer than they could before the pandemic. 

Nevertheless, Frankfurt and Munich still remain more affordable for this type of buyer than other global metropoles such as London, Tokyo, Paris, and Los Angeles. In Munich, a skilled service worker needs to work an average of 12 years to be able to afford a flat, while in Frankfurt, it's an average of nine. 

'The boom is coming to an end'

According to the study, Frankfurt and Munich currently have the highest risk of a housing bubble in the entirety of the Eurozone. 

In Frankfurt in particular, the housing market is already starting to cool off. After around a decade of consistent double-digit price increases, growth has now declined for the first time.

"Between mid-2021 and mid-2022, property prices only rose by around five percentage points," the report revealed. 

However, flat prices in Frankfurt are still more than 60 percent above the level of five years ago.

These survey results are backed up by the Immowelt Preiskompass. According to the property search portal Immowelt, the second quarter of 2022 saw reduced interest from buyers dampen purchase prices. This trend continued in the third quarter of the year, cementing the turnaround on the housing market. 

READ ALSO: Why house prices in Munich are starting to fall

Altbau properties in Munich

Altbau properties in Munich. Photo: picture alliance / Matthias Balk/dpa | Matthias Balk

UBS also pointed out that, while the population of Germany's banking capital has stagnated since the pandemic, new construction has accelerated in previous years. This could put an end to the low vacancy rates by increasing the housing stock over time. 

In Munich, meanwhile, the housing market is supported by an ultra-low vacancy rate and a growing work force, but the rather subdued German economic outlook presents a drag on housing demand, according to the report. 

Munich also has the highest price-to-rent ratio of all the properties surveyed, with average property prices equating to around 46 years of rental income, compared to 45 in Frankfurt. This makes buy-to-let properties much less attractive. 

After house prices more than doubled in the past decade, growth in the Bavarian capital is also slowing down to around five percent.

"The boom is coming to an end," said Kunkel, referring to both cities.

What's the definition of a 'housing bubble'? 

In economic terms, a bubble is a dramatic and sustained mispricing of an asset. 

Typical signs of a housing bubble include a decoupling of prices from local incomes and rents, and imbalances in the economy, such as excessive lending and construction activity.

These were the metrics used by UBS to identify risks of a housing bubble in global cities. 



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