Berlin property prices increased more than any other major city throughout 2017, a study from property consultancy Knight Frank reported on Wednesday.

The "Global Residential Cities Index" found average property prices in the German capital increased by 20.5 percent, 2 percentage points more than Izmir, Turkey, which ranked second. 

Three other German cities ranked in the top 10. Hamburg had the seventh highest housing price increase at 14.1 percent, followed by Munich in eighth (13.8 percent) and Frankfurt in 10th (13.4 percent).

Read more: Europe faces growing homeless population as housing costs soar

The study found that the average growth of housing prices worldwide has dropped from 7 percent overall in 2016 to 4.5 percent in 2017. Twelve cities, the study said, had a registered price growth above 20 percent in 2016, whereas Berlin was the only city to have a price growth above 20 percent in 2017.

The study attributed the large increase in Berlin to "strong population growth, a stable economy, record low unemployment and robust interest from overseas investors (are) together propelling prices higher."

A growing housing bubble?

In Berlin, where real estate was affordable for much of the past two decades, average property prices have increased by 120 percent since 2004. On top of that, Bundesbank, Germany's central bank, suggested in February that real estate prices in German cities may be overvalued by 15-30 percent and as much as 35 percent in Berlin. 

But the relatively low property prices are still attracting foreign investment as real estate analysts continue to cite Berlin as one of Europe's top real estate hotspots.  At the beginning of March, American billionaire Warren Buffet signed a deal with Berlin's Rubina Real Estate to buy upscale residential property in Berlin.

Many foreign investors are also buying up residential buildings in Berlin and renting out spaces to tourists, which has squeezed the housing market in the German capital.

Read more: Home sharing adds to Berlin housing squeeze

Lawmakers are making efforts to ease housing costs in the city. In 2016, the ruling Social Democrats (SPD) enacted a law — called Zweckentfremdungsverbotsgesetz — that fined landlords up to €100,000 ($125,000) for illegally renting out their property for short-term stays.

Germany's Senate Department for Urban Development and Housing reported in January that the law returned 8,000 apartments to the rental market in Berlin in 2017. Additionally, more than €2.6 million in fines have been imposed, according to public broadcaster RBB.

But housing demand in Berlin is expected to rise as the city's population, currently at 3.5 million, increases — it is expected to grow by 10.3 percent by 2030 and could reach 4 million by 2035.

Each evening at 1830 UTC, DW's editors send out a selection of the day's hard news and quality feature journalism. You can sign up to receive it directly here.