2023-09-01 16:24:19
After years of rising, the prices for houses and apartments in Germany have fallen – and the big question is how far down it can go. The warning from the Deutsche Bundesbank is that residential real estate in Germany was overpriced by an average of 20 to 30 percent in 2022 – and that the price exaggerations in the big cities were even more than 35 percent. If prices were to fall that much, there would probably be a bloodbath.
The forecast by DZ Bank, which had predicted a price drop of up to 6 percent, was considered more cautious. But that has now practically been achieved.
For the second quarter, the Association of German Pfandbrief Banks (VDP) reported a year-on-year price decline for residential and commercial real estate by 6.4 percent, for residential real estate alone by 5.4 percent and for residential real estate in the seven largest cities by 5 percent.
Price stabilization lasted only briefly
Commerzbank has now tried to make plausibility considerations in different ways as to how far this can go downwards. And other real estate experts such as Reiner Braun from the real estate institute Empirica do not consider these considerations to be totally absurd.
After a brief stabilization at the beginning of the year, house prices have now fallen again, write Commerzbank chief economist Jörg Krämer and economist Ralph Solveen. The economists use the Europace house price index as a benchmark. This refers to real transactions and often shows a strong consonance with the figures from the Federal Statistical Office, which are only published for the more recent development on September 22nd.
The prices for residential real estate were accordingly in July on average 6.5 percent lower than a year ago. In contrast to the second half of last year, not only the prices for existing properties have recently fallen, but also for new buildings.
House prices are falling
Residential real estate price index, quality-adjusted transaction prices
August 2005 = 100
Graphics: coz., sjs. / Source: Europace, Commerzbank Research
The reason for the drop in prices is primarily the noticeably higher interest rates. Compared to the period before the European Central Bank (ECB) turned around interest rates, interest rates on loans with a term of ten years have tripled to around 4 percent: “This means that prospective buyers can often no longer finance real estate at the prices that were usual until recently.”
The economists see the development of mortgage lending as a sign that the price correction is not over yet. “Recently, 40 percent fewer new mortgages were taken out than a year ago.”
Since the vast majority of home purchases are at least partially financed by borrowed capital, this points to a massive decline in transactions. Apparently, the prices demanded by the sellers could no longer be financed by the potential buyers.
Interest rates are not going down anytime soon
The European Central Bank (ECB) has so far left open whether it will pause interest rates in September after nine interest rate hikes in a row – or whether it will still make the ten. ECB President Christine Lagarde has only ruled out a rate cut.
“Since interest rates will probably not fall noticeably in the foreseeable future, there will be no avoiding a further correction,” write the Commerzbank economists. In the case of existing properties, this is probably still prevented by the fact that the sellers often do not want to accept price reductions because they could have achieved higher prices beforehand and, according to a Bundesbank survey, many still believed in rising property prices.
Sellers of new buildings, especially real estate developers, are often unable to accept price reductions in order not to end up in the red in view of the dramatically increased construction costs. “In the case of existing properties, it should only be a matter of time before prices start to move and the number of transactions normalises,” says Commerzbank.
Since the high construction costs for new buildings greatly restricted the scope for price concessions, the correction was made by a significant drop in future supply.
Arithmetically, purely from the rise in interest rates and the resulting burdens for new borrowers, there is a correction potential of 15 to 25 percent, says Commerzbank. The ratio of house prices to income and rents could also help to approximate the expected fall in house prices.
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The economists compared the current values with those from the late 1990s and early 2000s. With a view to the price-income ratio, a little more than half of the price correction would have been completed, and a third in relation to rents. Converted to real estate price changes, this would mean a further decline in house prices by 6 to 13 percent.
However, part of the correction in these ratios should not be caused by a fall in house prices, but rather by increasing comparative figures, Commerzbank believes. Income and rents are likely to increase over time and make the corresponding ratios look more favorable. The conclusion of the Commerzbank economists: “The need for corrections for house prices should range in the single-digit or low double-digit range.” That would mean: It goes further down – but not dramatically.
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