uThe prices for residential real estate in Germany fell by 5.4 percent over the year. In some cities even significantly stronger; where the boom was previously particularly pronounced, it is now going down particularly hard. In Frankfurt, for example, according to figures from the Association of German Pfandbrief Banks, prices were 9.1 percent below the previous year.
This development is accompanied by a significant decline in new construction projects and a slump in construction financing. Only 38 new apartments were sold in Frankfurt in the first half of 2023 – during the boom there were more than 1000 in such a period.
It’s no wonder that many are already asking themselves the question: is a real estate bubble bursting in Germany?
Bundesbank warnings
After all, the Deutsche Bundesbank had warned several times in the past that there were “exaggerations” in real estate prices as a side effect of the ultra-loose monetary policy. The European Systemic Risk Council had twice sent Germany a warning in this regard. And the Swiss bank UBS even took the view two years ago that Frankfurt was the global leader in terms of the “risk of a bubble” among the major cities.
The phase of low interest rates had a twofold effect on real estate prices, especially in Germany: on the one hand, financing for house buyers was extremely cheap, which drove demand. On the other hand, many international investors were desperately looking for reasonably profitable investments in a country that was considered relatively safe.
The drop in prices now seems to be caused primarily by the turnaround in interest rates for new apartments – with regard to existing apartments, there is probably the political uncertainty about future costs from new heating and better insulation.
However, economists dispute whether a real estate bubble had previously formed in Germany. Among these, there is not even unanimity as to whether real estate bubbles even exist.
In 2013, for example, the economists Robert Shiller and Eugene Fama were jointly awarded the Alfred Nobel Memorial Prize for economics. Of these, the first had dedicated half his life to researching financial bubbles – the second, however, did not believe in their existence and is said to have canceled his subscription to The Economist because the magazine constantly wrote about “bubbles”.
At least the view that financial bubbles can only be reliably recognized when they burst is quite widespread. An indication of this would be a particularly rapid and sharp drop in prices.
The real estate institute Empirica has compared the current house price decline in Germany with that in Spain and Ireland after the financial crisis. His result: It’s not that bad. In Spain, house prices had fallen by 25 percent in five years, and in Ireland they had halved. Germany is still a long way from such scenarios in all regions.
Ruined buildings are still rather rare
Ruined buildings like the ones you could see everywhere in Spain as a symbol of the real estate bubble are rare in Germany.
German banks have always credited themselves with the fact that they financed real estate more cautiously than institutes in other countries. From this, too, an argument was derived that real estate bubbles could cause less damage in this country.
In fact, unlike in the United States, banks looked more closely at the solvency of the borrower than at the value of the collateral when lending. The houses were generally not so highly loaned and the interest rates were fixed for the long term.
All of this makes real estate loans less vulnerable to price fluctuations. However, the solvency of the borrowers can of course also suffer from the economic downturn; The banks’ figures over the course of the year should show how this turns out.
In any case, so far there has been no news of a wave of defaults on private construction loans or of a dramatic increase in foreclosures, as is typical when real estate bubbles burst.
Nevertheless, the widespread notion that real estate prices in Germany will only continue to rise or at best move sideways in view of the housing shortage has obviously proved to be wrong.
However, to put it figuratively, it appears that the balloon has not burst – only that some air is escaping from it at the moment.
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