Is Germany’s housing market coping with the coronavirus?
Executive Education / 29 May 2020
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Jürgen Pfeffer ist Dozent an der Frankfurt School. Seine Schwerpunkte liegen auf dem Gebiet gewerbliche und wohnwirtschaftliche Immobilienfinanzierung, Bauträgerfinanzierung und Working Capital Management.

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Or: how are purchase prices trending on the housing market?

Owner-occupiers, capital investors, mortgage lenders, insurance companies, credit brokers – they all have one thing in common. In these challenging times, they are all equally concerned with future price trends on Germany’s residential property market. Will prices plummet? Or will they continue to rise? To date, there are no signs of a significant deterioration in housing market prices. But answers to these questions will come from the market itself – or more precisely, from the people and institutions who comprise the market, as a result of their expectations and decisions.

Below, we have put together five points in response to each question, all of which should be taken into account when assessing current market conditions.

What might suggest that residential property prices are going down?

  • Interest rates rise due to higher liquidity requirements resulting from e.g. loss of income.
  • Fewer people migrate to cities, or move within cities.
  • Distress sales of residential property become more likely.
  • New construction projects stall due to a lack of building materials and builders.
  • The COVID-induced slump in housing purchases over the last few months indicates a decline in investor demand.

What might suggest that residential property prices are going up?

  • Due to macroeconomic conditions, interest rates stay low; there is even a (remote) possibility of negative interest rates.
  • Following the reopening of European borders, people migrating into Germany from (southern) European countries and the UK drive up the housing demand.
  • Possible distress sales of housing continue to attract plenty of capital from investors wanting to invest in real estate.
  • Due to COVID, there are major delays in awarding building permits for new construction projects. New construction projects only come to market after lengthy delays, constraining the housing supply.
  • Finally, even if rents fall in the short term due to consumers’ financial difficulties, state subsidies such as housing benefits or reduced-hours compensation have a stabilising effect.

Taking all these factors together, higher levels of empty housing (as last seen in the 1990s) is not something we need to expect – for the time being at least. Interest rates will (must) remain at the current low levels. Apart from equity investments, investors have limited alternatives to real estate, and in the current macroeconomic conditions, mortgage rates are also persistently low. Indeed, the first lenders have already started to advertise real-estate loans at 0% interest. People will continue to move into cities – especially attractive ones. However, their expectations will change: In terms of size, layout and facilities, residential accommodation will have to be suitable for working from home (WFH). At present, investors are being very selective in their investment decisions, concentrating increasingly on the residential property segment (following the principle “everyone needs a home”). However, they are also focusing more than ever on good locations in stable conurbations. In short, the housing supply is likely to remain limited, while housing demand will at the very least remain stable or start to rise again – good news for the housing market.

We address all these issues in our seminars and certification courses, enabling participants to make their own independent judgements and apply them in their professional practices.