The German housing market has been strong for decades, but it faces a serious price drop in the coming years, analysts say.
Mortgage rates have skyrocketed. The 10-year fixed rate has risen from 1% to 3.9% since the beginning of the year, according to data from private loan firm Interhyp. Usually, this leads to a cooling in demand, as fewer and fewer people can afford to take out loans, writes CNBC.
The real estate market has already started to cool down. Prices have already fallen about 5% since March, according to data from Deutsche Bank, and will fall 20% to 25% from their peak, according to forecasts by macroeconomic analyst Jochen Mobert.
Rental income is a priority for German investors. Around 5 million people in Germany receive rental income, according to the Cologne Institute for Economic Research. According to the Bundesbank, it is the country with the second lowest home ownership rate of any OECD country.
While Deutsche Bank has no details on when the bottom will be hit, Mobert said it wouldn’t be a surprise if it happens in the next six months.
“There have already been quite serious price drops in June and July. In August, September and October, the price drops were less than 1%.”
According to Holger Schmieding, chief economist at Berenberg, house prices will fall “by at least 5%, even a little more” next year.
“If there is no energy crisis and recession, prices will rise. We are now facing a dramatic correction in conditions,” Michael Feuchtlander of the Cologne Institute for Economic Research told CNBC.
Interestingly, a UBS report recently named two German cities (Frankfurt and Munich) in the top five of its 2022 Global Real Estate Bubble Index as locations with “pronounced bubble characteristics”.
According to UBS, a “bubble” occurs when there is a serious divergence in the growth of home prices relative to local incomes and rents, and imbalances in the local economy, including excessive borrowing and construction activity.
The situation in Germany “will not be a typical bursting bubble like in the financial crisis. Rather, it will be a correction,” UBS real estate strategist Thomas Verragut told CNBC.
“A bursting bubble would mean prices fall by more than 15% and that would be a very, very bad and risky scenario,” he adds.
But not all financial institutions agree that the real estate market in Germany will sink. “There is indeed a slowdown in the growth of residential property prices, but it is so serious,” commented Bundesbank Vice President Claudia Buch, quoted by CNBC.
And S&P Global analysts disagree with the theory of a “severe decline” in the market. “We will probably have to revise our forecasts for German house prices for this year. We still have very strong demand,” said Sylvain Breuer, chief economist for EMEA at S&P Global Ratings.
According to data from the Association of German Banks Pfandbrief in the last quarter, prices increased by 6.1% compared to the previous quarter. It uses information from over 700 banks to produce its property price index.
The job market
Employment in Germany is at an all-time high, but with the country likely to enter a recession in the coming months, that could change
Movements in the job market will determine how the housing market changes, according to some analysts. “If the job market proves to be recession-proof, that’s good news for the housing market,” Breuer said.
