Mixed reports on direction of German residential housing prices

The researchers at Stuttgart bank LBBW expect "price declines in the middle single-digit percentage range" in the residential property market over the course of the year, with metropolitan areas being more affected more than small towns.

But nobody should be counting on "bargain prices", says LBBW real estate market analyst Martin Güth. After the steady upward trend of recent years, a consolidation as a result of the corona crisis can only be expected, he says in a recent note. 

The market is characterized by two contradictory trends. Due to the sharp recession, unemployment figures are likely to rise in the foreseeable future. Potential buyers unsettled by lower job security will have to be "modest in their choice" in view of weaker future wage growth. Lower immigration due to the pandemic is also having a dampening effect.

On the other hand, the attractiveness of residential real estate in the eyes of private households and institutional investors could continue to increase, precisely because of the current economic crisis, LBBW believes. After all, the price-driving factors of the past years are still very much present: new housing supply remains modest, the ECB is sticking to its interest rate policy, hence depressing the possible return on other forms of investment. "This could then lead to rising house prices again," Güth says, dampening hopes of a major cooling in the market. Corona may turn out to have been nothing more than a mere ‘pause for breath’ he says.

Meanwhile, property portal Immowelt sees NO ‘corona effect’ on house prices in its latest study. In 45 of 60 major cities in Germany, the supply prices (median values) of existing apartments rose in the first four months of this year compared to the last four months of the previous year. 

Immowelt analysed data for existing apartments between 40 sqm and 120 sqm which were completed in 2016 or earlier. Advertised prices went up only slightly in the majority of the seven top cities. For Cologne, Immowelt reports an increase of 1% within the first four months of this year compared to the period from September to December 2019, while the offer prices for units in Munich, Frankfurt and Stuttgart have risen somewhat more strongly - by 2%. In Düsseldorf, advertised prices rose by 3%, in Berlin by 4%. For Hamburg, on the other hand, Immowelt noted a fall of 1%.

However, the two crisis months of March and April, during which real estate trading plunged, are not shown separately. Immonet said it assumed the market would not suffer any major damage and will quickly pick up speed again." 

Immowelt said it saw significant price increases for second-tier cities, including Jena (+7%), Chemnitz (+6%) and Erfurt (+4%) in the eastern part of the republic, as well as for some cities in North Rhine-Westphalia (Mönchengladbach and Solingen +9% each, Paderborn +7%). However, Immowelt also puts these increases into perspective. They could be caused by fluctuations in supply and therefore turn out to be weaker in the coming months.

Nationwide property broker association IVD have issued their own figures which show a collapse in transaction volumes over the second quarter but again, no major dent in apartment prices. They’re expecting price rises for the year 2020 of between 2.5% and 3%, just above the rate of inflation. They point to the slowing down in the rate of increase of rents even before the coronavirus outbreak, rising on average in 2019 by 3.1% (down from 3.7% in 2018).

The IVD researcher say demand for housing will still outstrip supply after corona, with further inward immigration from other EU states, as occurred after the 2008-09 financial crisis. Existing tenants are likely to postpone plans to move into bigger and more expensive apartments, and tenant fluctuation overall will fall. Landlords, however, need to brace themselves for higher levels of missed rent payments in the third and fourth quarters, as the government support schemes for job support are wound down. If these have so far been held in check at under 1% of rental payments, expect this to rise to 4% to 5%, say the IVD researchers.

Price rises will also be dampened by corona, says IVD. Apartments of medium quality will rise by 4% to 5% (as against average price rises of 8.3% in 2019, and 9.4% in 2018). At pricier levels, there will be greater buyer hesitancy, while many international property buyers will stay out of the market altogether.

However, the researchers do make the argument that buyer groups, who might shrink from buying because of their more uncertain economic prospects, could be replaced by buyers now anxious to park their liquidity in property, as was noticeable in Germany after the financial crisis which broke out in the US in 2008. The researchers also forecast interest rates staying at all-time historic lows over at least the coming months.

Transaction volumes will have plunged by between 25% and 35% in the second quarter, the researchers say, but may well recover over the coming two quarters. IVD president Jürgen Michael Schick said, “The German real estate market is robust and will, from today’s perspective, likely get away lightly from the crisis. Only a massive long-term worsening of the broader economic environment could seriously drag down the real estate market, and at the moment it’s not looking like that’s the case.”