According to Karl Lagerfeld, trends don’t last longer than six months. However, the man with the powdered braid was a fashion designer and not a real estate professional. It’s about houses and Apartments instead of fine clothing, industry observers have been experiencing prices for a good decade that have been climbing so incessantly that some people think they recognize a kind of law of nature.
Recently, they even stepped up a notch: According to the Federal Statistical Office, residential real estate in Germany rose on average by a whopping eleven percent in 2021 compared to the previous year, which was an increase of at least 7.8 percent. The fourth quarter of 2021 set a record with an average price development of 12.2 percent – the strongest increase in residential real estate since time series analyzes began in 2000.
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In view of the economic and social situation, so much robustness is impressive. Because the challenges are piling up wherever you look. The violent return of inflation with its consequences for interest rate policy, the construction boom with its more than 300,000 residential units per year, the increasing climate policy requirements for buildings, the revaluation of the office market and of course the major problems with the supply chains, including the procurement of raw materials for the construction industry suffers drastically.
As a result, according to figures from the Federal Statistical Office, the prices for individual materials such as wood and steel rose more sharply last year than at any time since 1949. The same applies to the costs of the construction work that is in high demand – on average, companies demanded a whopping 9.1 percent more in 2021 than in the previous year.
Construction costs: war in Ukraine is pouring fuel to the fire
As if all that wasn’t enough, the war in Ukraine with its geopolitical upheavals is now adding fuel to the fire. And this at a time when the industry was in the process of resuming projects that were put on hold in the heyday of Corona. Putin’s invasion is now driving the price jumps and bottlenecks caused by the pandemic to such an extent that “a serious calculation of construction projects increasingly impossible” as Felix Pakleppa, General Manager of the Central Association of the German Construction Industry, urgently warns.
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The question remains: Against the background of so many imponderables, can the price trend in the real estate sector really continue like this? Doubts are necessary. At least the current “Germany Monitor” from Deutsche Bank reports them. The study gives an outlook on the German housing market in the current year and forecasts the first signs of relaxation for the long-lasting real estate cycle in 2024.
However, it does so with the necessary caution, after all contradictory developments characterize the situation: On the one hand, the arrival of countless war refugees with logical housing needs and rising inflation are delaying the end of the cycle; On the other hand, however, a committed climate policy and a reduction in financial incentives for energy-efficient refurbishment suggest that the cycle will soon come to an end.
Read more: Experts expect falling real estate prices: “Demand could collapse overnight”
According to Deutsche Bank, German real estate prices will only fall moderately. Assuming inflation of only two percent, the authors of the study put the decline between 2024 and 2026 at two percent per year, which means that real estate in Germany will remain expensive by international comparison. What’s more: If one assumes inflation to rise by another seven percent in 2022 and 2023 and assumes that average nominal price growth between 1970 and 2008 will be 2.5 percent after the correction phase, the fall in prices is likely to be even lower. According to the study, cumulative house prices in 2030 would then be 24 percent higher than in 2021.
Opportunities for house price increases vary from city to city
Even if the fundamental shortage of supply in many cities – for example due to lower influx during the pandemic years – has been eliminated: IReal estate investors need not worry unduly. Although there are certainly differences between the largest German cities. While there are signs of an end to shortages in Hamburg, Düsseldorf, Bremen and Nuremberg, in Berlin, Cologne, Stuttgart, Leipzig and Hanover there is a good chance that the markets there will remain tight for a few more years and prices will remain correspondingly stable.
- Currently at Berlin however, prices will remain tight well beyond 2024. The interplay of too few building permits from state decision-makers and a high influx of people, which almost offsets the immigration balance, acts as a price driver here.
- In München the researchers of the Germany Monitor recognize a clear lack of living space, but due to the extremely high ratings, they see the end of the cycle in the Bavarian state capital. And that could – as with the other candidates – have a not inconsiderable signal effect on the market.
- For the situation in Köln in turn, the Empirica real estate price index 1/2022 names the main reason: The risk of a bubble forming there is rather moderate, since too little is being built in the Rhine metropolis.
- The consolidation of the market in Frankfurt am Main on the other hand, indicates incorrect forecasts about Brexit. While in recent years large numbers of high-priced properties have been built in a rush, significantly fewer employees in the financial sector are drawn from Great Britain to the Main.
If you ask Empirica boss Reiner Braun what determines the price of an apartment the most, his answer is no longer, as has been the case for a long time, “location, location, location”. In our money-flooded economy, describe the rule of thumb “Interest, interest, interest” the central factor much earlier, because today every location would be paid for dearly.
This is still not wrong. In the case of luxury real estate in particular, persistently low or even negative interest rates throughout Europe are spurring on demand and ensuring handsome prices. After all, they make many other investments less profitable. In addition, Covid has given business in this segment a further boost. However, these purchases are often not even an investment in the traditional sense. The premium properties are popular with people who want to live in them themselves – and they themselves ensure attractive increases in value.
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