EXPLAINED: Why falling property prices in Germany mean tougher times for tenants
After more than a decade of a real estate boom in Germany, falling prices are expected. However, it means higher rents are expected for tenants.
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What's happening?
Rising interest rates, high construction prices, and record inflation are all affecting the housing market in Germany right now. And it has an effect on both potential buyers and renters.
The current situation - brought on by Russia's war on Ukraine that sparked the energy crisis as well as other factors - means that although prices of properties are starting to drop in some areas, many people cant afford to buy a home as mortgages have become harder to get. Meanwhile, companies are backing out of construction projects for new-builds.
One consequence of this is that people are switching to rented flats already on the market instead, pushing up the demand even further, and resulting in higher rents.
However, that's not the full picture. As housing is starting to come down in price - even in some big cities, the position of prospective buyers who do have the savings has improved somewhat.
READ ALSO: The hidden costs of buying a house in Germany
"We are currently seeing more offers on the real estate market and greater scope for price negotiations," said Mirjam Mohr, Senior Vice President Private Clients at Interhyp, a loan broker.
According to the Federal Statistical Office, prices for residential property fell by an average of 0.4 percent in the third quarter compared to the previous quarter. The Association of German Pfandbrief Banks (VDP) observed a decline of 0.7 percent - the first minus since 2010. Measured against the same quarter of the previous year, prices rose, albeit at a subdued pace.
What will happen this year to the property market?
According to experts, the trend is likely to accelerate. The German Institute for Economic Research (DIW) considers a decline in property prices of up 10 percent possible in 2023.
DZ Bank does not go that far, expecting prices to fall by a maximum of four to six percent this year.
"The decline is likely to be somewhat weaker for residential property and somewhat more pronounced for multi-family houses," said analyst at DZ Bank Thorsten Lange. However, real estate prices have roughly doubled within 10 years. Even a sharp decline of around 20 percent, which some in the industry thought possible, would only mean the level of 2020, said VDP chief executive Jens Tolckmitt.
Experts also doubt that Germany is on the verge of a property bubble bursting. The housing market is considered robust even in economic crises because real estate is often financed conservatively and on a long-term basis - an advantage during the rise in interest rates. That's why many buyers have secured low interest rates for 10 or 15 years.
READ ALSO: What experts say will happen to the German housing market in 2023
A view of houses and flats from above in Dresden, Saxony. Photo: picture alliance/dpa/dpa-Zentralbild | Robert Michael
"This is different in countries with variable loans such as the UK or Spain, where rising interest rates have an immediate impact on the loan burden," said a study by the Institute of the German Economy (IW). When interest rates climbed in the mid-2000s, it overwhelmed many Americans - the housing bubble burst and triggered the global financial crisis.
Another argument against a price collapse in Germany is that transaction costs, for example for estate agents, are high and discourage short-term sales. Price declines are mainly seen in properties in poor locations or with high energy consumption, said IW real estate expert Michael Voigtländer. "If the energy balance is high or decent, I don't see much potential for correction," he said.
Too few flats
Flats in Germany - particularly in large cities - remain in short supply. And it's getting worse - for months the Ifo Institute has been observing a wave of cancellations in residential construction.
Demand for construction financing and building permits have also slumped. Since the beginning of 2022, interest rates for 10-year loans have more than tripled. Together with high building prices, the burden is too great for many people.
The federal government's target of 400,000 new houses per year, which has since been scrapped, was considered impossible. The construction association ZDB expects 245,000 in 2023.
"But when a high demand for housing meets a shortage of supply, this supports (rising) prices," said IW expert Voigtländer. Furthermore, immigration from abroad, which plummeted during the pandemic, is likely to rise and increase the demand for housing, especially in cities.
Around half of the population rents rather than owns their home in Germany - more than any other country in Europe.
Demand will partly shift to the rental housing market and increase the pressure there, according to a study by Landesbank Helaba. After a phase with relatively low mark-ups, rents for new leases have recently risen more strongly again with an increase of five percent, said DZ Bank.
"There is a lot of pressure on the rental market," said analyst Lange. The strong demand for affordable housing is meeting with falling vacancy rates in the cities.
READ ALSO: The rules foreigners need to know when buying property in Germany
The bottleneck will not change in the new year, Lange said, also with a view to the immigration of refugees from Ukraine. With high material prices and significantly increased financing costs, housing companies are under pressure to pass the costs on to the renter.
IW expert Voigtländer believes it's conceivable that the trend that has lasted for years will turn around - and that property prices will no longer outpace rents.
According to IW data, asking rents rose by 5.8 percent in the third quarter in Germany compared to the same quarter last year. In all federal states, the increases were above the average of the third quarter of the past three years,. "We may now be entering a phase in which rents are growing more strongly than (property) prices," Voigtländer observes.
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What's happening?
Rising interest rates, high construction prices, and record inflation are all affecting the housing market in Germany right now. And it has an effect on both potential buyers and renters.
The current situation - brought on by Russia's war on Ukraine that sparked the energy crisis as well as other factors - means that although prices of properties are starting to drop in some areas, many people cant afford to buy a home as mortgages have become harder to get. Meanwhile, companies are backing out of construction projects for new-builds.
One consequence of this is that people are switching to rented flats already on the market instead, pushing up the demand even further, and resulting in higher rents.
However, that's not the full picture. As housing is starting to come down in price - even in some big cities, the position of prospective buyers who do have the savings has improved somewhat.
READ ALSO: The hidden costs of buying a house in Germany
"We are currently seeing more offers on the real estate market and greater scope for price negotiations," said Mirjam Mohr, Senior Vice President Private Clients at Interhyp, a loan broker.
According to the Federal Statistical Office, prices for residential property fell by an average of 0.4 percent in the third quarter compared to the previous quarter. The Association of German Pfandbrief Banks (VDP) observed a decline of 0.7 percent - the first minus since 2010. Measured against the same quarter of the previous year, prices rose, albeit at a subdued pace.
What will happen this year to the property market?
According to experts, the trend is likely to accelerate. The German Institute for Economic Research (DIW) considers a decline in property prices of up 10 percent possible in 2023.
DZ Bank does not go that far, expecting prices to fall by a maximum of four to six percent this year.
"The decline is likely to be somewhat weaker for residential property and somewhat more pronounced for multi-family houses," said analyst at DZ Bank Thorsten Lange. However, real estate prices have roughly doubled within 10 years. Even a sharp decline of around 20 percent, which some in the industry thought possible, would only mean the level of 2020, said VDP chief executive Jens Tolckmitt.
Experts also doubt that Germany is on the verge of a property bubble bursting. The housing market is considered robust even in economic crises because real estate is often financed conservatively and on a long-term basis - an advantage during the rise in interest rates. That's why many buyers have secured low interest rates for 10 or 15 years.
READ ALSO: What experts say will happen to the German housing market in 2023
"This is different in countries with variable loans such as the UK or Spain, where rising interest rates have an immediate impact on the loan burden," said a study by the Institute of the German Economy (IW). When interest rates climbed in the mid-2000s, it overwhelmed many Americans - the housing bubble burst and triggered the global financial crisis.
Another argument against a price collapse in Germany is that transaction costs, for example for estate agents, are high and discourage short-term sales. Price declines are mainly seen in properties in poor locations or with high energy consumption, said IW real estate expert Michael Voigtländer. "If the energy balance is high or decent, I don't see much potential for correction," he said.
Too few flats
Flats in Germany - particularly in large cities - remain in short supply. And it's getting worse - for months the Ifo Institute has been observing a wave of cancellations in residential construction.
Demand for construction financing and building permits have also slumped. Since the beginning of 2022, interest rates for 10-year loans have more than tripled. Together with high building prices, the burden is too great for many people.
The federal government's target of 400,000 new houses per year, which has since been scrapped, was considered impossible. The construction association ZDB expects 245,000 in 2023.
"But when a high demand for housing meets a shortage of supply, this supports (rising) prices," said IW expert Voigtländer. Furthermore, immigration from abroad, which plummeted during the pandemic, is likely to rise and increase the demand for housing, especially in cities.
Around half of the population rents rather than owns their home in Germany - more than any other country in Europe.
Demand will partly shift to the rental housing market and increase the pressure there, according to a study by Landesbank Helaba. After a phase with relatively low mark-ups, rents for new leases have recently risen more strongly again with an increase of five percent, said DZ Bank.
"There is a lot of pressure on the rental market," said analyst Lange. The strong demand for affordable housing is meeting with falling vacancy rates in the cities.
READ ALSO: The rules foreigners need to know when buying property in Germany
The bottleneck will not change in the new year, Lange said, also with a view to the immigration of refugees from Ukraine. With high material prices and significantly increased financing costs, housing companies are under pressure to pass the costs on to the renter.
IW expert Voigtländer believes it's conceivable that the trend that has lasted for years will turn around - and that property prices will no longer outpace rents.
According to IW data, asking rents rose by 5.8 percent in the third quarter in Germany compared to the same quarter last year. In all federal states, the increases were above the average of the third quarter of the past three years,. "We may now be entering a phase in which rents are growing more strongly than (property) prices," Voigtländer observes.
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