Will The German Housing Market Crash?

Key Takeaways

  • Real estate prices (in Germany) are mostly determined by 4 economic factors
  • 2 of these factors (mortgage interest rates & incomes) suggest that property prices in Germany will fall or crash
  • The other 2 factors (population development & supply of living space) indicate that the German real estate market will keep rising

Introduction: 4 Factors That Influence Real Estate Prices

Crash prophets always find a reason to predict falling prices in any financial market. Especially recently, more and more “news” got published that the German housing market will crash in the near future. Depending on the news website, headlines in the German media report very contrary price predictions for the German real estate market:

After reading these headlines, which were published in a very short timeframe within each other, one might wonder what will really happen to property prices in Germany. That is why this GermanReal.Estate blog post will check the facts to find out what is really happening in the German real estate market.

According to (real!) experts, property prices are determined by 4 economic factors: Mortgage interest rate, income, population development, and supply of living space. One could probably find hundreds of influencing factors that have somewhat of an influence on the German housing market, this article will examine these 4 major factors only in order to predict what will happen to property prices in Germany.

As 2 out of these 4 factors changed in the first half of 2022, this might also be the reason that leaves many people scared the German real estate bubble will finally popp (and properties become affordable again).

Reason 1 For A Real Estate Crash: Mortgage Interest Rates

Mortgage interest rates have been falling with interest rates around the world since the global financial crisis in 2007/2008. While German mortgage rates were at almost 9% in the mid 1990s, one could finance his property for around 0,5% interest in 2019 and 2020 (10-year fixed rate). After an almost constant decline in mortgage rates for 25 years (as seen in the chart below), interest started rising again in 2021.

Especially in mid 2021, mortgage interest rates started skyrocketing to about 4% in just a couple of weeks with increased inflation concerns, the war in Ukraine, and rising the rising key interest rate from the European Central Bank. The comparison below is showing how severe the increased mortgage rates are that 8x.

Comparison of a 100.000€ mortgage with different interest rates:
  • 0,5% interest: 208€ monthly payment, totaling 11.595€ in interest until the mortgage is paid off
  • 4% interest: 500€ monthly payment, totaling 65.066€ in interest until the mortgage is paid off

Aside from a monthly mortgage payment that more than doubled, an 8x mortgage rate results in +53.000€ more in interest payments during the duration of the mortgage. The increased mortgage rate drives up living costs for homeowners and brings down returns for real estate investors.

Additionally, it has gotten increasingly difficult to secure a mortgage in the first place, as German banks started increasing their equity requirements. Also, with inflation in the Euro area to be expected 10% in October 2022, the ECB is expected to increase its key interest rate again in the near future.

While the increased lending rates hurt property buyers applying for a mortgage, other investments (i.e. bonds) are getting more attractive as interest rates around the world keep rising. Property developers financing through our platform pay interest to our investors, instead of paying interest to a bank. That is one of the many benefits of tokenized real estate that investors can earn more money when interest rates are rising.

Invest blockchain-based in real estate security tokens here:

Reason 2 For A Real Estate Crash: Income

As (disposable) income determines how much property people can afford, the second economic factor is the real income of the population. While the average German net income was 2.439€ in the year 1960, the average German will earn 25.583€ net salary in 2022 (see statistic here). When inflation rises by 10% but average incomes only by 3%, the real income is going down.

When the real income of the average German population goes down, real estate prices have to follow eventually as fewer and fewer people can afford to buy a property. That is why we decided to have investing minimums in our real estate security tokens as low as economically possible with 100€ to allow everyone to invest in real estate in Germany.

The world bank stated in a press release in September 2022 that the risk of a global recession in 2023 keeps rising. If the recession is happening, it is expected that some incomes will at least stagnate and some people might even lose their job. Bringing another strong argument that real estate prices will fall accordingly.

Especially the number of homebuyers is expected to decrease significantly during a recession, as people do not want the pressure to pay off a mortgage for decades if they are not sure how secure their income really is. Ask yourself: Would you like to get a mortgage if you are not sure how secure your job really is? 🤔

2 Reasons For Rising Real Estate Prices

The 2 arguments above leave many people worried and scared that property prices in Germany will fall in the near future (especially German people). Should you be scared as well that the German real estate “bubble” will finally burst?

Panicking is a highly emotional reaction that is never good when trying to make rational investment decisions. We recommend looking at facts rather than clickbait from German news websites that are just trying to get you scared. There will always be a reason for crash prophets to predict falling prices. Be it because of the pandemic, inflation concerns, the war in Ukraine, rising interest rates, etc.

Nobody has a glass ball and knows exactly what will happen to real estate prices in the future. The remaining 2 factors on the list of 4 major factors that influence (the German) real estate market give strong arguments for why property prices in Germany will continue to be strong. Regionally, some real estate prices might decrease a little over the short term, but over the long term, the overall German real estate market is going to be fine.