Little likelihood of residential price collapse - IW study

A new study released by the Cologne-based Institut der deutschen Wirtschaft (IW) offers a fairly benign prognosis for the likely trajectory of German real estate prices, with property prices across Germany's 50 largest cities falling only moderately, despite the Coronavirus pandemic.

The study, carried out by the usually employer-friendly IW on behalf of Deutsche Reihenhaus AG, forecasts price falls of anywhere between zero and at most 12%, with the obvious proviso that the heavier the economic collapse, the greater the likelihood of price falls. Any real collapse is likely to feathered by further falls in interest rates, say the IW researchers.

An analysis of Google searches for new property purchases in Germany shows a dramatic reduction since the beginning of March in the amount of private people looking to buy or even rent new apartments. According to the IW's Dr. Michael Voigtlaender, this indicates a likely slight fall in residential prices, but no major collapse. The marginal fall is more related to dampened future rental income expectations, as well as heightened general uncertainty, demanding a certain risk premium, whereby the actual level of price falls will be correlated with the long-term interest rates, against which the attractiveness of real estate investment is measured.

The researchers paint three different scenarios for their analysis. If expectations for future rental income were as bad as during the financial crisis of 2008-09, then residential prices could expect to fall this year by about 17%. This is highly unlikely, since this would depend on the highly improbable likelihood of stagnating interest rates. Assuming interest rates fall further, prices are likely to fall less steeply, if at all. A pullback of between zero and twelve percent would thus look realistic.

Heavier price falls could be expected if the coronavirus crisis were bursting a property price bubble, which is not the case in Germany, argue the researchers. There has neither been a speculative building boom over the past few years beyond actual housing need, nor has there been a complete mismatch between tenant and owner-occupier costs, the typical signs of a property bubble.

Another factor favouring price stability is the fact that rents have held so steady, with Voigtländer saying there is currently no indication that rental levels are poised to collapse. As experience and data from the financial crisis shows, rents only correlate with GDP when the economy is in a boom phase - in times of crisis, rents tend to stagnate, with landlords generally opting to leave an apartment empty rather than lower the actual rent.