Germany’s housing market is ripe for a serious price correction, economists warn

The German housing market has been remarkably strong over the past few decades, but is facing a serious price correction in the next few years, according to some analysts.

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The German housing market has been remarkably strong for decades, but faces a serious price correction in the next couple of years, according to analysts.

Mortgage rates have risen, with the 10-year fixed rate from 1% to 3.9% since the start of the year, according to Interhyp data, which typically causes demand to fall as fewer people can afford to take loans.

House prices have already fallen around 5% since March, according to Deutsche Bank data, and will fall between 20% and 25% in total from peak to trough, predicts Jochen Moebert, macroeconomic analyst of -the German lender.

“If you think about mortgage rates of 3.5% or 4% then you need higher rental yields for investors and since rents are relatively fixed, it is clear that prices must fall,” says Jochen. Rental income is a priority for German investors, with around 5 million people in Germany receiving rental income, according to the Cologne Institute for Economic Research, and the country having the second l -lowest share of homeowners than all OECD countries, according to the Bundesbank.

While Deutsche Bank does not have specific data for when the bottom will be reached, Jochen said he would not be surprised if it is during the next six months.

“We have already seen the sharpest price drop if you look month to month – this was in June and July… In August, September and October, the price drop is already below 1%. .. So there is some positive momentum here if you look from an investor’s perspective”.

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Holger Schmieding, chief economist at Berenberg, anticipates a drop in house prices of “at least 5% if not a bit more” in the next year.

“The housing market is slowing down significantly,” he said, citing a sharp drop in demand for loans and a slowdown in home construction.

The German economic outlook

And while the language used may vary, many analysts are predicting a slowdown in Germany’s housing market.

“We expect that if there was no energy crisis, no recession, prices would increase further. Now we have a situation where we face a very dramatic adjustment of conditions,” said Michael Voigtländer from The Cologne Institute for Economic Research CNBC.

A recent UBS report went so far as to place two German cities — Frankfurt and Munich — in the top four of its Global Real Estate Bubble Index for 2022, as places with “strong bubble characteristics”.

UBS defines the qualities of the “bubble” as a decoupling of house prices from incomes and local rents and imbalances in the local economy, including excessive lending and construction activity.

However, the definition does not fit the German real estate market as a whole, UBS Real Estate strategist Thomas Veraguth told CNBC.

The situation in Germany “will not be a typical bubble burst as we experienced in the financial crisis … but rather it will be a correction,” Veraguth said.

“In real terms a bubble burst would be more than a 15% drop in prices and that would be a very bad scenario, a very strong and high risk scenario which is not the base case at the moment,” he added.

A Reuters poll of property market experts last month anticipated that German house prices would fall by 3.5% next year.

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‘vulnerable’ market

But not all financial institutions agree that Germany’s property market is set for a major correction.

“We see a slowdown in price growth for residential real estate but not that the overall dynamic has reversed,” Bundesbank Vice President Claudia Buch said in an interview with CNBC’s Joumanna Bercetche last month. that passed

“On balance, house prices are still rising, albeit at a slower pace,” Buch said. “That said, there are no signs of a severe fall in real estate prices or overvaluation abating.”

The Bundesbank will continue to monitor the housing market closely because it is “vulnerable”, according to Buch.

The German central bank sees a slowdown in the property market but no significant correction in the future

Analysts at S&P Global also rejected the idea of ​​a “severe fall” in the market. In fact, the financial analysis company said the outlook is stronger than its most recent forecast, published in July.

“It is likely that we will have to revise our price forecast for Germany for this year,” Sylvain Broyer, chief EMEA economist at S&P Global Ratings, told CNBC.

“We have very strong demand,” he said.

Broyer also said that it will take time for a change in financial conditions and fiscal tightening to reduce and affect the demand for housing.

“More than 80% of mortgages in Germany are financed with fixed rates, so many houses are locked [in] the very favorable financing conditions we had until recently for five to 10 years,” he said.

The Association of German Pfandbrief Banks (VDP) uses information from more than 700 banks to produce its property price index, and data from the last three months shows that prices have risen by 6.1% compared to the previous quarter.

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The organization anticipates that we have already seen the peak in property prices in Germany “for now” but the fundamentals of the market are still working well, according to VDP CEO Jens Tolckmitt.

Housing shortages, rising rents and a strong labor market will continue to support the market, Tolckmitt said, and even if housing prices fall, that’s not necessarily a bad thing. .

“If house prices fall by 20%, which we don’t expect at the moment, then we will be at the price level of 2020. Is this a problem? Maybe not,” said Tolckmitt.

“That was the price level we reached after 10 years of price increases,” he added.

The labor market is essential

The movements in the labor market will determine how the real estate market changes, according to some analysts.

“If the labor market proves resilient to the technical recession that we will have at the end of this year for the next, this is a strong positive for the housing market,” said Broyer.

Schmieding made similar comments but in the longer term, saying that the medium to long term outlook for the German property market “will be good, as long as the country has a good labor market.”

Commerzbank expects an increase in bad loans, says CEO, but no disaster

Employment in Germany is at a record high of 75.8%, but with the country likely to slip into a “mild recession” in the coming months, that figure could be affected.

German GDP figures released last month raised hopes of a milder-than-expected recession, with the economy growing slightly more than expected in the third quarter.

The German economy grew by 0.4% compared to the second quarter and by 1.3% year on year, according to the Federal Statistical Office.


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