Germany’s housing market is facing a serious downturn in prices, analysts say

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Germany's economic outlook

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

Tim Graham/Staff/Getty Images

The German housing market has been remarkably strong for decades, but analysts say it is facing a serious price drop in the next few years.

Mortgage rates have risen from 1% to 3.9% for 10-year mortgages since the start of the year, according to Interhyp data, which has typically caused demand to cool as fewer people can afford to borrow.

Property prices are already down around 5% since March, according to Deutsche Bank, and will fall between 20% and 25% overall from peak to trough, predicts Jochen Moebert, macroeconomic analyst at Deutsche Bank.

“If you’re thinking of 3.5% or 4% mortgage rates, you need higher rental yields for investors, and since rents are relatively firm, prices clearly have to come down,” Moebert said.

Rental income is a priority for German investors as around 5 million people in Germany earn income from rentals, according to the German Economic Institute, and the country has the second-lowest percentage of homeowners of any OECD country, Bundesbank.

While Deutsche Bank doesn’t have concrete data on when the bottom will be reached, Moebert said he wouldn’t be surprised if that happens in the next six months.

“We’ve already seen the biggest price drops if you look month-to-month – that was June and July… In August, September and October price drops are already below 1%… So there’s some positive momentum here if you’re from.” Here’s an investor’s perspective.”

Holger Schmieding, chief economist at Berenberg, expects house prices to fall by “at least 5%, if not a little more” next year.

“The housing market is weakening significantly,” he said, citing a sharp decline in credit demand and a decline in housing construction.

And while the language used may vary, many analysts are predicting a dip in the German housing market.

“We expected prices to keep going up if there wasn’t an energy crisis, if there wasn’t a recession. Now we have a situation where we are facing a very dramatic adjustment of conditions,” Michael Voigtländer of the Cologne Institute for Economic Research told CNBC.

A recent UBS report even went so far as to place two German cities – Frankfurt and Munich – in the top four of its 2022 Global Real Estate Bubble Index as locations with “pronounced bubble characteristics”.

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

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 bursting of a bubble, as we experienced in the financial crisis … but rather a correction,” said Veraguth.

“In reality, a bubble burst would mean a price drop of more than 15% and that would be a very, very bad scenario, a very strong, high-risk scenario, which is not the base case at the moment,” he added.

A Reuters poll of property market experts last month projected that German property prices would fall 3.5% over the next year.

A “vulnerable” market

But not all financial institutions agree that the German real estate market is set for a major drop in value.

“We’re seeing a slowdown in house price growth, but it’s not like the overall momentum has reversed,” Bundesbank Vice President Claudia Buch said in an interview with CNBC’s Joumanna Bercetche last month.

“Overall, real estate prices are still rising, albeit at a slower pace,” Buch said. “However, there are no signs of a sharp collapse in house prices or a decline in overvaluations.”

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

The German central bank predicts a slowdown in the real estate market, but no significant correction

Analysts at S&P Global have also dismissed the idea of ​​a “severe plunge” in the market. In fact, the financial analytics firm said the outlook is better than its most recent forecast, which was released in July.

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

“We still have very strong demand,” he said.

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

“More than 80% of construction financing in Germany is financed with fixed interest rates, so many households are blocked [in] the very favorable financing terms that we had for five to ten years until recently,” he said.

The Association of German Pfandbrief Banks (VDP) uses information from more than 700 banks to compile its house price index, and data for the most recent quarter shows prices are up 6.1% from the previous quarter.

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

Housing shortages, rising rents and a strong job market will continue to support the market, Tolckmitt said, and even if house prices did fall, it wouldn’t necessarily be a bad thing.

“If house prices fell by 20%, which we are not currently expecting, then we would be at 2020 price levels. Is that a problem? Maybe not,” Tolckmitt said.

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

The labor market is crucial

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

“Should the labor market prove resilient to the technical recession that we’re going to have late this year into next, that’s a strong upside for the housing market,” Broyer said.

Schmieding made a similar point but over a longer period of time, saying the medium to long-term prospects for the German property market are “good as long as the country has a buoyant job market”.

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

German GDP numbers released last month raised hopes of a milder-than-expected recession as the economy grew slightly faster than expected in the third quarter.

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