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Pressure on the rental market is increasing: harder times expected for tenants

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According to experts, real estate prices could fall by up to ten percent, but rents are likely to increase in 2023. The reason for this is, among other things, higher material and financing costs, which are passed on to the rent.

After more than a decade in which real estate prices in Germany only went up, experts expect prices to fall – but rents to increase. Because with rising interest rates on loans and high construction costs, many people can no longer afford to own property or are withdrawing from construction projects.

Many are switching to rented apartments, so that rents are climbing more strongly again. This affects many people in Germany, since only around half of the population owns property – fewer than in almost any other country in Europe. According to the Federal Statistical Office, the ownership rate is 46.5 percent.

Unusual picture on the real estate market

It’s an unusual picture: After more than twelve years of rising prices, houses and apartments are a little cheaper again, even in sought-after cities. The position of prospective buyers has improved somewhat. “We are currently seeing more offers and greater scope for price negotiations on the real estate market,” says Mirjam Mohr, private customer director at the credit broker Interhyp.

According to the Federal Statistical Office, prices for residential real estate fell by an average of 0.4 percent in the third quarter compared to the previous quarter. The Association of German Pfandbrief Banks (VDP) observed a decline of 0.7 percent – the first minus since 2010. Compared to the same quarter last year, prices rose, albeit subduedly.

Fall in real estate prices by up to ten percent

According to experts, the trend is likely to accelerate. The German Institute for Economic Research (DIW) considers a fall in real estate prices of up to ten percent possible in 2023. In a study in 97 cities, the researchers observe that prices have continued to decouple from rents – a sign of “speculative exaggerations”. A property in large cities recently cost as much as 28 annual rents – a record since the mid-1990s. The DIW sees an increased risk of price corrections.

DZ Bank, which expects a maximum price drop of four to six percent in 2023, does not go quite as far. “In the case of residential property, the decline is likely to be somewhat weaker, in the case of apartment buildings a little more pronounced,” writes analyst Thorsten Lange. Real estate prices have roughly doubled in the last ten years. Even a sharp drop of around 20 percent, which some in the industry thought was possible, would only mean 2020 levels, said VDP chief executive Jens Tolckmitt.

Robust real estate market in Germany

Experts also doubt that Germany is about to burst a real estate bubble. The housing market is considered to be robust even in economic crises, because real estate is often financed conservatively and over the long term – an advantage when interest rates rise. Many buyers had secured the low interest rates for ten or 15 years.

“This is different in countries with variable loans such as the United Kingdom or Spain, where rising interest rates have a direct impact on the credit burden,” says a study by the German Economic Institute (IW). When interest rates rose in the mid-2000s, many Americans were overwhelmed – the real estate bubble burst and triggered the global financial crisis.

Another argument against a price collapse in Germany is that the transaction costs, for example for brokers, are high and discourage short-term sales. According to IW real estate expert Michael Voigtländer, price declines can be seen primarily in properties in poor locations or with high energy consumption. “If the energy balance is high or decent, I don’t see much potential for correction.”

Construction loan more than tripled

In addition, housing remains scarce: the ifo Institute has been observing a wave of cancellations in housing construction for months. Demand for mortgage lending and building permits have also collapsed. Since the beginning of the year, interest rates on ten-year loans have more than tripled. Together with high construction costs, the burden is too great for many people. The construction rate is currently just under 3.8 percent; At the beginning of 2022 it was still one percent. The federal government’s target of 400,000 new apartments per year, which has now been dropped, was considered utopian: the ZDB construction association expects 245,000 in the coming year.

“But if a high demand for housing meets a shortage of supply, that supports prices,” explains IW expert Voigtländer. In addition, immigration from abroad, which collapsed during the pandemic, is likely to increase and increase demand for housing, especially in cities.

Pressure on the rental housing market is increasing

But what if real estate prices don’t fall sharply and loans have become more expensive? “The market environment offers opportunities for buyers with strong equity,” says Lange from DZ Bank. Prospective buyers with little savings, on the other hand, would have to have a high income in order not to fail due to the much higher loan rates.

Often there is only dodge: According to a study by the Landesbank Helaba, demand will partly shift to the rental housing market and increase the pressure there. After a phase with relatively low surcharges, new contract rents have recently increased again more strongly with an increase of five percent, observes DZ Bank.

Rents could rise faster than prices

“There’s a lot of pressure on the rental market,” says analyst Lange. There, the strong demand for affordable housing is meeting falling vacancy rates in the cities. Nothing will change in the bottleneck in the new year, says Lange, also with a view to the immigration of war refugees from Ukraine. With the high material prices and significantly increased financing costs, housing companies are under pressure to pass the costs on to the rent.

IW expert Voigtländer thinks it is conceivable that the long-term trend will turn and real estate prices will no longer outpace rents. According to IW data, asking rents rose by 5.8 percent in the third quarter compared to the same quarter of the previous year. In all federal states, growth was above the average for the third quarter of the past three years, as Voigtländer observes. “Perhaps we are now entering a phase in which rents are growing faster than prices.”