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Drops of up to ten percent: economists fear the erosion of real estate prices

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According to a study by the German Institute for Economic Research (DIW), the risk of severe price corrections on the real estate market is increasing. “We are not about to see a huge real estate price bubble bursting in Germany,” said DIW study author Konstantin Kholodilin on the study, which was available to the Reuters news agency on Wednesday. “But price drops of up to ten percent for condominiums and homes are quite possible.”

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Accordingly, the prices for homes and condominiums in the 97 cities surveyed have risen an average of eleven percent this year, while rents have increased by only four percent.

The DIW considers it alarming that purchase prices and rents are diverging in this way. “Since real estate purchases are refinanced through rental income – or in the case of owner-occupancy through saved rental payments – real estate prices should develop in line with rents in the long term.”

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If this is not the case, the suspicion arises that real estate is being used as a speculative object and that price bubbles could occur. According to the researchers, statistical tests have confirmed such speculative price exaggerations.

Nevertheless, the real estate market in Germany should remain comparatively stable, write the authors Konstantin Kholodilin and Malte Rieth. Financing conditions are deteriorating visibly as a result of rising interest rates. However, the proportion of loans with a long-term fixed interest rate is still relatively high and there is no sign of widespread household debt.

In addition, the high real estate prices in many places were due to high demand combined with low supply. The population is growing again in many German cities, while too few new apartments are being built due to less favorable financing conditions, enormously increased construction costs and, in many places, staff shortages. In big cities like Berlin, Dusseldorf and Cologne, the number of completed apartments actually fell last year.

Demand for more construction investments

The DIW experts therefore see it as the turn of politics. You must focus on providing affordable housing in the metropolitan areas. “Politicians should quickly give new impetus to new construction activity with accelerated procedures and higher public construction investments,” said Rieth.

The DIW calculations are based on data from the real estate association IVD for the years 1996 to 2022. Accordingly, the prices for single-family and terraced houses have roughly doubled in the past decade. Condominiums became more expensive by around half in the same period, and building plots by around a third.

Rents also rose by an average of 56 percent, but in many cases significantly less than the prices for residential property. A property in large cities recently cost as much as 28 annual rents – a high since the mid-1990s. (Reuters)

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Source: Tagesspiegel

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