Trend reversal in apartments and houses: real estate prices could collapse

Status: 11/23/2022 10:09 am

Recently, rents have not risen as much as the prices for condominiums and homes. Experts therefore expect a strong price correction on the real estate market.

There are increasing signs of a trend reversal on the real estate market. Industry experts have long suspected that prices for residential real estate could fall significantly in the future. The experts at the German Institute for Economic Research (DIW) have now backed this up with specific figures.

Price slumps of up to ten percent

According to a DIW study, the risk of severe price corrections on the real estate market is increasing. “We are not about to see a huge real estate price bubble bursting in Germany,” said DIW study author Konstantin Kholodilin on the study, which was available to the Reuters news agency. “But price slumps of up to ten percent for condominiums and homes are quite possible.”

The background to this forecast by the DIW experts is the immense gap between the price development for owner-occupied homes and condominiums on the one hand and the rental price development on the other. According to the study, home and condominium prices in the 97 cities surveyed have risen an average of 11 percent this year, while rents have risen just four percent.

Speculative exaggerations in real estate prices

The DIW considers it alarming that purchase prices and rents are diverging in this way. “Since real estate purchases are refinanced through rental income – or in the case of owner-occupation through saved rental payments – real estate prices should develop in line with rents in the long term.”

If this is not the case, the suspicion arises that real estate is being used as a speculative object and that price bubbles could occur. According to the researchers, statistical tests have confirmed such speculative price exaggerations.

Continued high demand for homes

Nevertheless, the real estate market in Germany should remain comparatively stable, write the authors Konstantin Kholodilin and Malte Rieth, also referring to the persistently high demand. This is offset by a continued low supply. In big cities like Berlin, Dusseldorf and Cologne, the number of completed apartments actually fell last year.

The DIW experts therefore believe it is the politicians’ turn and call for more public investment and accelerated procedures to provide affordable housing in the metropolitan areas.

House prices have fallen for the first time in 12 years

In any case, the days of ever-increasing real estate prices seem to be a thing of the past. According to the Association of German Pfandbrief Banks (VDP), residential real estate prices fell slightly by 0.7 percent in the third quarter compared to the previous quarter. That doesn’t seem like much – and yet this development is remarkable, as it was the first price drop in twelve years.

The data from the Federal Statistical Office for the third quarter are still pending. In the second quarter, the prices for condominiums and single- and two-family houses had risen by an average of 2.5 percent compared to the previous quarter. Compared to the same quarter of the previous year, prices even rose by 10.2 percent.

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