AThere is a noticeable shift in the German housing market: For many years, low interest rates have given a further boost to property prices, as the Deutsche Bundesbank has repeatedly pointed out in its monthly reports. Bundesbank experts have warned that this would lead to an exaggeration of house prices, especially in large cities. The European Central Bank (ECB) has now announced a benchmark interest rate hike for July and September for the first time in eleven years. And even before this step, building interest in Germany had increased dramatically in a relatively short time: from less than one percent for ten-year fixed-interest home loans at the turn of the year to the current 3, 31 percent. “The last time there was such an extreme upward trend was in 1981,” reports Max Herbst of FMH-Finanzberatung.
More room for negotiation
An interesting question now is whether this rapid rise in interest rates is already reflected in the trend in property prices. Because if higher interest rates make it impossible for some to buy a home and other forms of investment become more attractive at the same time, it could slow down the rise in property prices. The credit intermediary dott. Klein, who examines price developments in metropolitan regions in an index on a quarterly basis, concludes for the first quarter that no effects can yet be observed. This corresponds to data from the Association of German Banks Pfandbrief. The advisors of dr. However, Klein reports that the market is losing momentum: here and there it is already possible to negotiate the price down. The brokerage platform Europace, which, according to the company, handles more than 20 percent of all real estate financing for private clients in Germany, is currently reporting a somewhat weakened recent price trend.
“I would expect substantial price effects only if the interest rate for ten-year home loans were significantly above 3 percent,” says Michael Voigtländer, a real estate expert at the German Institute of Economics. In the past, price developments on the German real estate market had proved relatively robust. The upheaval of the corona pandemic had little effect on her: prices continued to rise. In a report released Tuesday by the German Economic Institute for the industrial association ZIA, however, it is stated: “There are many indications that the market is entering a recession and that a new real estate cycle is heralding.”
Monthly changes in property prices should always be treated with some caution, as some fluctuations are not uncommon. However, in the latest data from Europace, which are based on actual transactions and not on asking prices, a sobering trend can be observed: in all three segments, new single and semi-detached houses, existing houses and condominiums, the increase in May compared to the previous month it was less than 0.5 percent, which had been very different for a long time. However, whether this will remain the case remains to be seen. On an annual basis, i.e. compared to May 2021, the rates of increase in prices are still double-digit.
First difficulties with older items
With real estate funds, some consequences can already be felt: the rating agency Scope has just downgraded six funds, among other things due to the risks deriving from the reversal of interest rates. In any case, for the luxury real estate market, the real estate agent chain Sotheby’s International Realty in Germany reported that property prices from the 1970s to the 1990s were stagnant or even falling. The reasons are, on the one hand, rising interest rates and rising inflation. On the other hand, there was a lack of craftsmen and materials, which in turn led to an increase in costs and at least made the properties to be renovated less attractive. On the other hand, the demand for high quality properties that do not need renovation is uninterrupted.
“We assume prices will remain at a high level overall,” said Mirjam Mohr, board member of real estate loan broker Interhyp. “However, we believe it is possible that the increase will flatten out from current levels, prices could eventually also fall in some regions and / or segments – due to the current dynamic situation, however, forecasts are currently subject to great uncertainty.” however, Interhyp does not assume that the increase in interest rates on construction in Germany has already reached its peak. Mohr said: “We currently expect ten-year loan interest rates to range from 3.5 to around 4% by the end of the year.”