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How long house prices could continue to fall and how serious the situation really is

2023-03-08T09:27:38.018Z


Real estate prices in Germany have only gone in one direction in recent years - upwards. However, in view of the high inflation and rising interest rates, the upward trend came to an abrupt halt. The correction is running. How long it could last, how serious the situation is, explains the chief economist at Commerzbank, Dr. Jörg Krämer in the guest article.


Real estate prices in Germany have only gone in one direction in recent years - upwards.

However, in view of the high inflation and rising interest rates, the upward trend came to an abrupt halt.

The correction is running.

How long it could last, how serious the situation is, explains the chief economist at Commerzbank, Dr.

Jörg Krämer in the guest article.

Berlin – After house prices had risen sharply for years, the combination of rising interest rates and construction costs put an end to the boom.

Since the middle of last year, the purchase prices for residential real estate in Germany have already fallen by six percent.

The prices for existing real estate suffered particularly badly, with a minus of eight percent.

This is also due to the massive increase in energy costs, which makes heating older, poorly insulated houses with their often outdated heating systems more expensive.

Real estate prices: the correction process is not yet over

A rapid stabilization of house prices is unlikely.

The price expectations of potential buyers and sellers are often still too far apart.

In view of the significantly increased financing costs for a house, buyers want to pay significantly less than before the rise in interest rates.

On the other hand, many sellers are not yet ready to accept a significant discount from the prices they were able to achieve a short time ago.

This correction process is not finished yet.

On the other hand, there are some arguments against a deep slump in house prices lasting several years:

voice of economists

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This applies to current news, but also to very fundamental questions: How do the billions in corona aid and the debt brake go together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

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 Germany's leading economists provide guest contributions with assessments, insights and study results on the most important economic issues - profound, competent and opinionated.

Tight supply and few distressed sales support house prices

Due to immigration, the demand for living space remains high.

At the same time, due to the massive increase in interest rates and building prices, far fewer new apartments are being built - also by real estate developers.

Orders in the construction industry have fallen by more than a third since the spring of last year.

The central association of the housing industry only expects around 240,000 apartments to be completed this year;

that is around a fifth less than at the peak of 2020. Less supply meets strong demand in the medium term, which supports house prices.

Another argument against a long and deep fall in house prices is that distress sales are unlikely to result in a glut of supply.

Of course, homeowners have to pay significantly higher interest rates for follow-up financing for a ten-year mortgage loan than they did a year ago.

But compared to the interest rates prevailing ten years ago, the increase is not that strong.

In addition, homeowners have since repaid a significant portion of their loans.

It is no coincidence that data from the specialist publisher Argetra show that the number of foreclosures in 2022 was even lower than in 2021, despite the interest rate increases. Even if the number of emergency sales were to increase noticeably, given the around 750,000 real estate transactions (in 2020), this would not really be the case supply shock.

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Real estate market: no bubble

Analyzes by the Bundesbank show that the prices for residential real estate in the cities are well above what fundamental data such as demographics, income, interest rates etc. suggest.

House prices are too high.

But this overvaluation is nowhere near as high as it was in the US or Spain in 2006, where we know with hindsight that there was a housing bubble.

In the past 50 years, house prices throughout Germany have not fallen significantly after sharp increases like in the second half of the 1970s or in the first half of the 1990s.

Rather, they trended sideways for a long time until house prices had fallen enough relative to rising consumer prices to be cheap again.

All in all, there are strong reasons against a deep fall in house prices lasting several years, even if the correction is not over yet.

About the author:

Dr.

Jörg Krämer is chief economist at Commerzbank in Frankfurt.

Source: merkur

All news articles on 2023-03-08

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