Central banks are trying to control inflation by increasing interest rates. This decision is undoubtedly aiding in the reduction of global inflation, but it has a consequence. Higher interest means pain for the housing market, which is already in decline, especially in Germany.
The housing market may be in trouble
The financial crisis in 2008 caused a global decline in almost all housing markets worldwide. However, then we saw a decade-long expansion throughout the whole world. Especially the German housing market has been solid for the last few decades, but analysts noticed it is starting to fall amid rising loan rates.
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Since the beginning of the year, the 10-year fixed mortgage rate has gone up from 1% to 3.3%, according to data from Interhyp. When mortgage rates go up, demand tends to go down because fewer people can afford to take out loans.
According to Deutsche Bank, house prices have already dropped about 5% since early 2022. Jochen Moebert, a macroeconomic analyst at a German bank, thinks prices will drop between 20% and 25% from top to bottom. This means there’s still a lot of room to fall. More importantly, the housing market is closely connected with the stock market and they can have an effect on each other.
“If you think about mortgage rates of 3.5% or 4%, then you need higher rental yields for investors, and given that rents are relatively fixed, it’s clear prices have to fall,” Moebert claims.
According to the Cologne Institute for Economic Research, there are around 5 million people in Germany who make money from renting. They need low rates to profit in the long run, so these higher loan rates may destroy some businesses. And the ECB still only hiked rates three times this year, compared to six rate increases by the Fed.
Moebert said that he wouldn’t be surprised if the bottom happened in the next six months, even though Deutsche Bank doesn’t know for sure when it will happen.
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Berenberg’s chief economist, Holger Schmieding, expects home values to fall by “at least 5%, if not a bit more,” over the course of the next year. He added that “the housing market is slowing dramatically.” He then highlighted that a large decline in demand for loans as well as a decrease in the construction of new homes can be the evidence of it.
A recent analysis by UBS went so far as to place two German cities, Frankfurt and Munich, in the top four of its Global Real Estate Bubble Index for 2022 as sites with “strong bubble characteristics.” The characteristics of a bubble allegedly include the decoupling of home prices from local earnings and rents as well as imbalances in the local economy. These could be excessive loaning and building construction activity.
Is it really that bad?
According to Sylvain Broyer, who is the senior economist for EMEA at S&P Global Ratings, “it’s possible that we will have to revise up our price projections for Germany for this year.” He continued by saying, “we still have very strong demand.”
Broyer added that it will take some time for a change in the financial conditions and tightening of fiscal policy to effect the housing demand in a trickle-down manner.
“More than 80% of mortgages in Germany are funded with fixed rates. As a result, many homeowners have locked in for 5 to 10 years the very favorable financing conditions we enjoyed until very recently,” he added.
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