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Interest Rates Are Rising: Can Buyers Hope For A Fall In Property Prices Anytime?

After more than ten years of real estate boom
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Rising Interest Rates: Can Buyers Now Hope for Falling Property Prices?

After years of rapid price increases, turbulence is mounting on the housing market. As interest rates rise, record prices for apartments and houses are becoming increasingly difficult to finance. Are the prices going down now?

After more than ten years of real estate boom in Germany and skyrocketing prices, some experts expect a turnaround in the real estate market. Whether it’s soaring building interest rates, uncertainty due to the war in Ukraine, expensive building materials or delivery bottlenecks, turbulence is on the rise. Especially due to rising interest rates, more and more people can no longer afford to buy an apartment or house. Will the boom end soon?

So far, there have been pull-forward effects from people wanting to buy real estate quickly before construction interest rates continued to rise, says Michael Voigtländer, a real estate expert at the German Institute of Economics (IW). “In the second quarter, however, we should see a turnaround in the housing market,” he says. “It is clear that with rapidly rising interest rates, more and more buyer groups will leave the market.” The picture is also changing for large investors. “They still want to buy, but at lower prices given the higher interest rates.”

However, it is also conceivable that prices will stagnate for a longer period of time, until the market regains balance through rising incomes, Voigtländer says. The rents of the new contracts are also unlikely to grow that strongly. “The high energy costs are reflected in the ancillary costs and put a strain on people’s ability to pay.”

Interest rates have skyrocketed in just a few months. According to FMH Finanzberatung, based in Frankfurt, interest rates for standard 10-year loans have risen since December from 0.9% to around 2.5% more recently, the fastest increase since 1980. FMH believes the trend will continue to grow: “Interest rates of four percent this year is not pessimism, but very realistic.”

From a historical perspective, building interest rates are still relatively low, Stefan Mitropoulos, an economist at Landesbank Helaba, wrote in a recent analysis. However, the rise in interest rates should not be underestimated. “Significantly higher financing costs are likely to dampen demand for residential property in general and direct it more towards the more affordable areas surrounding large cities.”

In recent years, property prices have risen faster and faster, despite all the warnings of a bubble. In 2021, buyers of apartments and houses had to pay an average of 11% more than the previous year. The Bundesbank has been alarmed for years by the trend towards excessive real estate prices. In the spring he warned that real estate prices in cities are between 15% and 40% higher than the price that can basically be justified.

Deutsche Bank experts also predict that the housing market bullish cycle is nearing its end and that, according to their models, it will end in 2024. Price overstatements are on the rise, while fewer people have moved to Germany during the year. pandemic and new construction increased dynamically, wrote expert Jochen Möbert. He expects a “modest price correction” rather than collapses.

Uncertainty is already evident on the stock market. Shares of real estate companies such as Vonovia plummeted as investors are critical of the industry’s outlook on rising interest rates. And developers of residential and commercial projects also face headwinds. As funding costs rise, banks are becoming more reluctant to lend, research firm Bulwiengesa reported.

However, strong new construction is not to be expected to eliminate the housing shortage in many metropolitan areas. Surprisingly, just as many as 293,000 apartments were completed last year, miles away from the federal government’s goal of 400,000 new apartments a year. Living space therefore remains a scarce and expensive commodity in many places.

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