Global Real Estate Crash In 2023?
- The German newspaper Handelsblatt and the American bank Goldman Sachs are predicting falling real estate prices in 2023
- Rising mortgage interest rates will increase the costs of real estate investing and bring down profitability
- Other important factors that influence (German) real estate prices are left aside by Goldman Sachs and Handelsblatt
- Will global real estate crash in 2023? We certainly have a mixed opinion on the real estate bubble discussion!
Introduction: Analysts Predict A Global Real Estate Market Crash
One of the largest German business newspapers Handelsblatt just recently published an article on their website that “Analysts expect global real estate prices to fall from 2023 onwards.“ The article itself does not reveal who these “analysts” are supposed to be, but it is likely that Handelsblatt is referring to this article from Goldman Sachs published also in October of 2022 “Why Home Prices are Poised to Fall.”
Are real estate prices all over the world going to crash in 2023? And if so, what would that mean for the German real estate market (properties directly as well as indirect real estate investments like REITs, real estate ETFs, or crowdfunding)? That is what we will answer in this GermanReal.Estate blog post. According to our understanding of the property market in Germany, Goldman Sachs might have a valid point, but real estate has a lot more influencing factors than just rising mortgage interest rates.
Will Rising Mortgage Rates Cause A Real Estate Crash?
The one (and almost only) argument from Goldman Sachs supporting the real estate crash prediction is that interest rates are rising all over the world since the start of 2022. As of writing this article, the Federal Reserve in the US increased their Federal Funds Rate to 3,25% and our European Central Bank increased their key interest rate from 0% to 1,25%.
Consequently, when central banks around the world increase interest rates, banks are raising their mortgage interest rates as well. While German mortgage rates were between 0,5% to 1% at the beginning of 2022, they spiked up quickly to 4% with rising inflation and the war in Ukraine. The current mortgage interest rate when you are reading this article can be found in the interactive table below:
Examples of different mortgage interest rates:
- A 100.000€ mortgage with an interest rate of 0,5% is costing 208€ monthly or 11.595€ in total interest until the loan is paid back
- A 100.000€ mortgage with an interest rate of 4% is costing 500€ monthly or 65.066€ in total interest until the loan is paid back
As seen in the example above, the higher the mortgage rates, the higher the costs to buy properties and own properties. Consequently, investors can afford to buy less property or will shy away completely from investing in real estate. Meaning a low-interest rate environment will make real estate prices go up, and a high-interest rate environment will make real estate prices go down.
In this regard, we can agree with Goldman Sachs that real estate prices might fall in 2023. But there is one important question that is left aside here: Who is affected by the change in mortgage interest rates? While 40% of Brits need to refinance their mortgage in 2023 according to the Bank of England, standard German mortgages fix interest rates for at least 10 or 15 years. And 10 or 15 years ago we also had around 3% mortgage rates in Germany.
Which Factors Influence (German) Real Estate Prices?
Aside from mortgage interest rates, there are a lot more economic factors that have an influence on real estate prices. When looking at just one factor alone, you will get a pretty incomplete picture and might come therefore to wrong conclusions when trying to predict the future of the German real estate market.
Factors supporting that real estate prices will fall in 2023:
- Mortgage rates: Rising mortgage interest rates increase the costs for real estate investors and therefore decrease their returns when investing in properties (in Germany).
- Income: If the income of the population is rising faster than mortgage rates, the costs to buy and own properties become more affordable for the population even though mortgage rates are rising.
Factors supporting that real estate prices will rise in 2023:
- Demographics: If the population of a country is growing (like the German population which is currently at an all-time high), the demand for living space will keep on increasing accordingly.
- Supply of living space: Germany is creating around 200.000 to 300.000 new flats every year while the demand for flats is 400.000 flats. If the demand outgrows the supply of living space, how are property prices or rent prices supposed to fall?
As ever so often, a coin has multiple sides, and the question if real estate prices will fall in 2023 has multiple sides as well. In case you would like to take a deeper look into the real estate bubble discussion to make up your own mind, the 2 videos from our YouTube channel below will give you more insides:
Conclusion: Will The Global Real Estate Market Crash In 2023?
Nobody has a glass ball and can predict exactly what will happen in the future. The only thing we can do is to take statistics and data of the present to project what might happen in the future. Goldman Sachs is taking the rising mortgage interest rates to project that global real estate prices will fall in 2023 (as seen in the chart below).
This blog post showed that there are a lot more influencing factors on the (German) real estate market than just interest rates. Buying a great property in a great location will always lead to great investment success over the long term. And that is what we are trying to help you do: Approaching real estate investing with an investor mindset.
So if you would like to invest in real estate in Germany in the easiest way possible, then check out our real estate security tokens that are currently available on our primary and secondary markets. By investing in our real estate security tokens you do not have to find your own property, secure a mortgage, or deal with tenants. And that is why GermanReal.Estate is the true future of investing in real estate.