Forecasters reference Bundesbank warnings of 'overvaluation'
Taking a stab at predicting how far German residential house prices could fall has become almost a national obsession. Naturally it's all speculation, but that hasn't stopped many of Germany's banks and real estate brokers issuing confident predictions as to how long the current malaise affecting the investing environment will go on.
We don't have a crystal ball here at REFIRE, but it's our job to monitor the market closely, and to point out anomalies and inconsistencies in the pronouncements made by the countless market gurus out there, and - to the best of our abilities - to verify the data sources and evaluate the oracles based on track record. It's important in a market like Germany to remember that collective figures are limited in their usefulness, as regional and urban/rural differences play such a large role for investors trying to make qualified market assessments.
Most forecasters refer in their research to the benchmark figure given by the Bundesbank last year that German residential prices on average were 20-30% overvalued, with the overheating of prices in the biggest cities reflecting an overvaluation of prices by up to 35%. The DZ Bank, by contrast, predicted price reversals of up to 6% - a level which has surely been reached in most markets. These figures are largely supported by the Association of German Pfandbrief Banks (VdP)(which we report on elsewhere in this issue), which expects price falls of 5.0-5.4%, depending on the size of city.
Recent research by Commerzbank economists Jörg Kramer and Ralph Solve show prices have fallen again recently, basing their figures on the House Price Index of Europace, an index we track closely here at REFIRE as it is based on actual transactional data, and not wishful thinking or advertised prices, which may not have been achieved in practice. Their research indicates prices are 6.5% down on a year ago, with both existing and new-build housing falling in value.
They point to the amount of new mortgage finance issued, down 40% on a year ago, suggesting that prices being sought by sellers are simply not being matched by buyers ability to finance purchases. The recent further interest rate rise imposed by the European Central Bank won't have slowed the downward correction in prices. The two economists differentiate between existing and new-build prices, with the latter strongly constrained by the higher building costs which will inevitably reduce future supply. They certainly see a correction potential of 15-25% based on the rapid interest rate rise and its influence on new borrowers.
The two Commerzbank economists compared the current values with those of the late 1990s and early 2000s. In terms of the price-income ratio, slightly more than half of the price correction would by now typically have been completed; in terms of rents, one-third. As expressed in house price changes, this would imply a further 6% to 13% decline in house prices.
However, part of the correction in these ratios is likely to come not from a decline in house prices but from rising comparables, Commerzbank says. Thus, over time, incomes and rents should increase, making the corresponding ratios look more favorable. The Commerzbank economists conclude: "The need for a correction in house prices is likely to be in the single-digit or low double-digit range." This would mean that things will continue to go down - but not dramatically.
Brokers, too, are analysing the market carefully. Colliers has just brought out its latest report, "Residential Investment 2023/24: Residential and Commercial Properties at a Glance." It concludes that the purchase prices of so-called 'apartment buildings' (Zinshäuser) - the classical 4- to 5-story 'Altbau' properties in and around city centres - have now fallen by an average of 17%, bringing them back to the price level of 2018. Colliers believes that these properties have reached a bottom, albeit further slight corrections are still possible in sub-segments.
Felix von Saucken, Head of Residential Germany, Colliers
Felix von Saucken, Head of Residential Germany at Colliers, commented: "In Germany, the housing shortage is becoming increasingly severe because too little is being built. Therefore, rents in the existing stock will inevitably continue to rise and this prospect of rental growth argues against a further drop in purchase prices. The bottom has been reached in many places. Prospective buyers can buy again with a clear conscience if they are convinced of the qualities of a property."
The price decline is reflected in higher net initial yields, which are likely also to stabilise, say Colliers. For Germany as a whole, yields on apartment buildings have risen from 3.9% in 2022 to the current 4.5%. In the seven metropolitan areas of Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Stuttgart and Munich, yields rose from 3.0% in 2022 to 3.8% at present.
Rents are continuing to move upwards, with greater housing demand and extra pressure from those now unable to buy. Average rents in the top 50 cities continued to rise by 2% in existing buildings and 4% in new construction. Rent increases were even more pronounced in the top 7 metropolitan areas, rising 4% in existing and 6% in new construction. This trend will continue because too little is being built while, at the same time, the number of households continues to rise. Colliers reckons that, in the 50 biggest German cities, more than 500,000 new households will come into being by 2035, independent of falling current demographic trends, due to the rise in single households and higher rental space demands per person.
Von Saucken emphasises how this point is often neglected, the megatrend of the steadily rising number of households, and how this will benefit buyers. "It is precisely the combination of too few apartments and ever more households that is causing the increasing drama in the German housing market," he says. "It may sound cynical, but buyers of apartment buildings will benefit from this development in a special way, as a turnaround in the housing market is not in sight."
Colliers takes the view that, in economic terms, German rents are still affordable, even in the Big 7 cities where residential rents for new leases have risen by an average of 55% over the past 10 years. Over the same period, average household incomes rose by about 32%. This represents an average rent burden ratio of about 30% in 2022, as against 25% in the same cities ten years ago (based on a 95 m² apartment when newly rented and without ancillary costs, i.e. 'Kaltmiete').
Von Saucken considers a rent burden ratio of 30% to be not unreasonable in a European context, while conceding that even that view might make him unpopular. Of course, the situation IS deteriorating for the lowest income households, he acknowledges, and this is where the most help is needed. The traditional 'Zinshaus', though, still represents a solid investment where landlords should have little difficulty in finding suitable tenants for their properties, he believes.
