German real estate market: no worries about overheating

Germany's Housing Market Is Hot. Is It Overheating? : NPR

At the beginning of the Corona crisis, it looked as if the real estate market would suffer as much as all other sectors and asset classes – but that quickly changed. Real estate in Germany is still considered a “safe haven”. Above all, residential real estate is in focus.

Many sectors of the economy are suffering due to the Corona crisis. Businesses in tourism, trade and culture continue to be severely restricted and are eagerly awaiting the end of the pandemic. The Corona pandemic is also challenging for investors. The fluctuations on the capital markets have never been as great as in 2020 and experts expect anything but a stable development for 2021 as well. Severe price corrections are still part and parcel of the markets. 

But there are also exceptions, for example the real estate market. At the beginning of the crisis, it looked as if it would suffer just as much as all other sectors and asset classes – on the contrary: the price level for rents and purchases remained at a constantly high level in 2020 and will probably remain so. A figure on this from the Federal Statistical Office: in the third quarter of 2020, prices for residential property in Germany were 2.6 per cent higher than in the second quarter – and 7.6 per cent higher than in the same quarter of 2019. This means that, despite the Corona crisis, prices have risen on average more strongly than at any time since the fourth quarter of 2016. Back then, the increase had been 8.4 per cent. And in the second quarter of 2020, in the midst of the first lockdown and shortly thereafter, prices of privately owned residential properties rose 6.8 per cent from the same quarter a year earlier, as the experts of Immobilienmakler Kassel state. Apartment buildings became 5.2 per cent more expensive and office buildings 6.3 per cent.

We do not see any danger of a significant decline this year either. All indicators suggest that the real estate market will be very robust and defend its position. Residential real estate in particular continues to be in high demand. For commercial real estate, it depends on how quickly the crisis is overcome and things pick up again for the sectors that are particularly affected.

For example, W├╝stenrot, the construction finance provider, states: “Numerous experts forecast that the development of real estate prices in Germany will continue to follow the upward trend until 2025 and beyond. At least if interest rates remain at their low level. Researchers see reasons here, among other things, in the growing demand for space per inhabitant and in an increasing number of single households.” The issue of low interest rates is particularly important. We follow the experts’ assessment that interest rates will remain low in the next few years. This means that the financing situation remains very attractive for owner-occupiers and investors. Of course, this compensates for the rising prices. That is why we do not see a bubble in the real estate market. Especially in Germany, prices remain at a moderate level.

Referring to a current study by the consulting firm Ernst & Young, 98 percent of the investors surveyed for this study assess the local real estate market as attractive to very attractive with a view to 2021. And: After numerous transactions did not materialise last year due to the Corona restrictions, many of the respondents now expect catch-up effects and thus an increasing transaction volume or a sideways movement at a high level. According to the survey, up to 77 percent of investors expect rising prices for residential real estate. This also fits in with the fact that the number of building permits has risen sharply recently. In November, the authorities gave the green light for the construction of 32,531 flats. This was an increase of 8.9 per cent within a year. In the first eleven months of 2020, this resulted in an increase of 3.9 per cent. This development helps to reduce the demand overhang in the long term.

This means in summary that rents and purchase prices will remain the focus of investors in 2021. Especially in the pandemic, real estate in Germany is thus still considered a “safe haven”. Anyone who gets a good investment opportunity in a region with strong development and is able to hedge any risks that may arise through stable financing with sufficient equity should grab it.