Residential prices to rise again in 2022, but affordability to worsen

As we report elsewhere, the residential portion of total German real estate transaction volume is likely to be over 50%, topping €50bn in an exceptional year for the housing markets. Broker group Savills, in its end-of-year outlook, describes the conditions this year as almost a "perfect storm". Residential even topped the market share list for the first time, far outstripping offices. The outlook for 2022 and beyond, however, is more negative.

Savills head of research Matthias Pink says the mix of investment in residential this year was 'almost perfect' from an investor perspective. Falling bond yields, strong demographic growth, a rise in household income, and limited new housing supply. Corona, far from dampening the market, actually provided further support. What's not to like?

In Savills' view, prospects for 2022 are not as rosy. The "quasi-guarantee of rising rents and prices nationwide" won't be valid next year. While building completions will increase, population moves will fall, while bond yields may start to become more attractive. Household incomes might still rise, but inflation has been rising too, jumping to 6% in Germany in November - the highest recorded since January 1997.

A recent Reuters poll would seem to back this up. While price growth is set to ease over the coming years, affordability will worsen as supply constraints keep values elevated, offsetting a negative impact from tighter monetary policy. The poll, of 11 property market experts, concluded that, after soaring an estimated 10.0% this year, residential prices will rise 6.0% next year, 4.0% in 2023 and 2.0% in 2024.

But poll respondents were unanimous in saying that affordability would worsen over the next two years. When asked what would help improve affordability, respondents cited tax deductions, higher wages, a faster building pace and reduced legislation, amongst others.

Sebastian Schejdar at BayernLB was quoted as saying: “The continuing price increase, especially in metropolitan areas, will exclude an increasing proportion of the German population from owner-occupied housing.”

Carsten Brzeski at ING said: “To improve affordability, real estate prices would have to come down or wages would have to rise faster than real estate prices. Additionally, a decrease in mortgage interest rates would improve affordability.”

European Central Bank board member Isabel Schnabel said in early December that the Bank could not ignore the surge in property prices that has led to a potentially dangerous overvaluation. The Bank pared interest rates to a record low at the start of the pandemic, and although most observers don't expect the Bank to increase borrowing costs until at least 2024, it does plan to end its emergency asset purchase programme much sooner.

While broker groups like Savills may be forecasting the end of the residential price boom in the medium term, in the short term there are several indicators that next year will see a further increase in prices and rents - driven by inflation fears and low interest rates.

Fahrländer Partner Raumentwicklung (FPRE), a Swiss-headquartered research and consulting house with growing operations in Germany, sees in its latest autumn survey of 500 German property professionals further price rises coming.

Around 61% of respondents expect prices for residential property to rise and a further 10% even expect them to rise 'sharply'. Only around 2% expect prices to fall; in autumn 2020 this was still the case for one tenth of respondents. These assessments apply to both condominiums and single-family homes - for which the FPRE price expectations index reached a new high.

The majority of respondents also expect prices for residential rents to rise in the next 12 months. The price expectations index climbed from 19.0 points in autumn 2020 to almost 50.0 points in spring 2021 and now stands at 57.3 points. 55% of the experts expect rents to rise, 44% to remain stable. Only a negligible number of respondents expect rents to fall or fall sharply.

For prices for apartment buildings, there has been no change in expectations since the spring. The nationwide price expectations index fell slightly from 79.1 to 78.2 points. As in spring 2021, just under 70% of the experts expect rising or strongly rising transaction prices, 29% stable and 2% falling.

Dr. Stefan Fahrländer, CEO of FPRE, said of the survey findings, "Despite all the price increases, residential real estate remains the focus of investors. Particularly in the conurbations, there is no end in sight to the rising transaction and rental prices. With rising consumer prices and persistently low interest rates, many investors consider real estate more than ever to be an adequate means of warding off inflation. The future, and in particular the future interest rate policy, will show to what extent this calculation is correct. In any case, investors will have to reckon with rising prices in the coming 12 months."