The real estate market in Germany is showing signs of recovery after experiencing a significant price decline due to the ECB's interest rate hikes, according to research by Commerzbank.
Prices for existing properties have started to increase slightly this year, suggesting that the price correction may have ended sooner than anticipated. While Commerzbank previously expected prices to continue falling, the current assessment is that real estate is still overvalued by 5-10%.
Sellers' expectations are now more aligned with buyers', who are less willing to pay higher prices due to tougher financing conditions. This, as well as rising demand for mortgage loans, suggests that further price declines are unlikely. A majority of German banks have reported increased demand for mortgage loans in the past two quarters, according to the ECB's Bank Lending Survey.
Per capita disposable income has grown significantly in recent years, and this trend is expected to continue. While inflation has reduced household purchasing power, those considering buying property are unlikely to spend all their income on essential goods.
Real estate prices are expected to rise moderately in the coming year due to limited support from interest rates. While the ECB is likely to cut interest rates further, the reduction will be less than the market anticipates. This means that interest rates on ten-year mortgage loans are unlikely to decrease significantly in the near future and may even rise slightly later in 2025.
The shortage of housing in many regions is another potential factor contributing to rising real estate prices. The Cologne Institute for Economic Research estimates that demand for new apartments will reach 370,000 units by 2025 and 300,000 units annually by 2030. According to ARGE, a network of the construction industry in Northern Germany, this demand is driven by both immigration and the trend of fewer people living in households, which leads to an increase in the number of households.
Between 2010 and 2022, fewer apartments were completed each year than were approved for construction. The Ifo Institute forecasts that building completions will decline to below 200,000 units by 2026, falling short of the demand predicted by the IW Cologne.
Contributing factors to the low level of construction activity include the increasing labor shortage, ongoing concerns about the reluctance of local authorities to allocate new land for development, and stricter building standards. Additionally, regulations on the rental market have limited rent increases, making it less profitable for investors to build new properties given the higher construction costs.
Real estate prices are expected to increase at a faster pace than overall consumer prices or rents due to the existing housing shortages. However, Commerzbank does not anticipate a significant price boom like the one seen in the decade before interest rates began to rise.
