Berlin-based digital property platform PREA is confidently predicting further price corrections in the German housing market through 2024. This is in contrast to the far more optimistic predictions emanating from across the industry (most notably from the established broker community) who are seeing 'grass shoots of recovery' and 'bottoms' being formed around every corner.
Gabriel Khodzitski, CEO and Founder, PREA
In a clear statement about the conclusions of their data-driven study, PREA's CEO Gabriel Khodzitski says: "Our study shows that current hopes for a reversal in the trend of residential property prices are premature. Institutional investors and private buyers would be better off waiting if in doubt, as scientific analysis still confirms significant downward potential."
The PREA analysis confirms a positive correlation between the duration and dynamics of upswings and downturns. In a nutshell, what we're experiencing now as a downturn has so far been both too short and not severe enough, says the analysis. PREA expects further corrections until at least Q1 in 2025, and that prices will fall back to the level of early 2017 by the end of this year. This probably won't apply to the largest cities, whose falls are being buffered by a corresponding rise in rents.
Real estate, as an asset class, has enjoyed a long period of more than a decade without any competition. But now, with higher interest rates, there is plenty of competition, in the form of equities or government bonds. This makes residential property less attractive by comparison, which should usher in further price falls. This applies to both institutional investors and private individuals, with home ownership remaining out of the reach, despite the recent price reductions.
Dr. Martin Kern, Senior Data Analyst, PREA
According to Dr Martin Kern, senior market analyst at PREA, "Although prices for residential properties in Germany have already fallen by 21% between the first quarter of 2022 and the third quarter of 2023, we don't think the bottom has yet been reached. The saying 'Survive until 25' is likely to become a reality for many market participants."
In concrete terms, PREA is saying that even high-earning households with a monthly income of €5,000 or more can only afford a larger existing apartment in the top-7 cities by spending up to 50% of their monthly net household income on the mortgage financing. Kern says, 'Newly built apartments are also unaffordable for this group. As long as even high earners cannot afford property, demand will remain low and prices will have to adjust.'
Kern foresees fresh supply coming onto the market as owners facing refinancing this year and next at higher interest rates opt to sell instead. After that, any existing advantages of renting versus buying could start to be eroded as rising rents cross the point at which they might be lower than interest expenses, prompting fresh demand for ownership.
REFIRE: All in all, a persuasive scenario as to what might play out in Germany over the next twelve months. REFIRE has met PREA several times to gain a better understanding of their technology and thought processes, and we have to admit that our own journey in learning about practical applications of AI since its popularisation over the last eighteen months has helped us here. Three or four years ago we struggled to penetrate the mysteries of how AI could revolutionise the somewhat staid practices of the industry. We're getting there.
PREA is a technology and property company that has developed its own proprietary ecosystem and AI model to analyse risks and returns on past property cycles to help make reliable predictions on future investment. Its main guide is machine learning and distributed computing, based on technology and data science, rather than a traditional team of real estate veterans. Its team of 50 is mainly made up of data scientists and software engineers.
Led by Gabriel Khodzitski, PREA says it is committed to developing infinitely scalable digital solutions for the complete digitalisation of the real estate and construction industry. We can only move towards a zero-emission future when the world can digitally capture fundamental ESG data faster and process it in an automated and AI-supported infrastructure (big data), PREA is convinced.
