"Breather" from Corona: Price pressure on real estate could ease

Saturday, January 02, 2021

"Breather" through Corona
Real estate price pressure could ease

Contrary to expectations, the 2020 coronavirus pandemic is leaving few marks on the real estate market. Rather, prices are rising significantly. Many Germans are drawn from the city to the surrounding area. In the new year, the situation could ease somewhat, predict economists.

After an uninterrupted real estate boom even during the Corona crisis, economists are expecting a little less price pressure in the new year. "The housing markets in Germany are surprisingly robust," said Stefan Mitropoulos, economist and real estate expert at Landesbank Hessen-Thüringen (Helaba). "No break-in is to be expected, rather a breather." The pandemic will probably dampen the price increase. Instead of rates of five to six percent per year, apartments and houses could become more expensive by four percent in 2021.

Michael Voigtländer, real estate expert at the Institut der Deutschen Wirtschaft, assumes that prices will not rise as strongly in the new decade after the long boom. "Interest rates on real estate loans have already fallen sharply, and the enormous boom in the labor market cannot simply be repeated." With the Corona crisis, some experts had expected an end to the year-long real estate boom. During the shutdown in the spring, the housing market came to a standstill, there were no advertisements, and there were hardly any visits.

But the prices for apartments and houses continued to rise – despite the historical slump in the German economy with millions of short-time workers and rising unemployment. In the third quarter, residential real estate rose 7.8 percent compared to the same period last year. According to the Federal Statistical Office, this was the strongest price increase since the end of 2016. Prices skyrocketed not only in metropolitan areas, but also in medium-sized cities and more densely populated rural areas. In the summer quarter the increase was also strong with a plus of 6.6 percent. No trace of the crisis.

"The run on real estate is unbroken," said Thomas Krahl, who heads the real estate business at asset manager Deutsche Oppenheim. There is great interest in the asset class – as is the willingness to pay higher prices. "Some time ago 25 times the annual rent was considered expensive, today 28 to 30 annual rents are also accepted as purchase prices." Wealthy families bought entire apartment portfolios in cities.

Wish for the house in the country

Mitropoulos believes that little is likely to change in people's regional living preferences this year. "People move to where the jobs are." These are the metropolitan areas, even if the surrounding area with home office and the high prices in the big cities becomes more attractive. Those who also work from home and no longer have to go to the office every day can accept a longer commute. In times of shutdown and home office, many people wanted more space, a balcony or a garden. That is more likely to be found in the bacon belts than in the expensive centers of Berlin, Munich, Hamburg and Frankfurt am Main.

The desire for a little house in the country is driving the demand for homes. The prices for single and two-family houses shot up by 8.6 percent in the third quarter, the Hamburg research institute F + B recently determined. "We are of the opinion that the corona pandemic has generated an additional and apparently sustainable boost in demand with a limited supply at the same time," said F + B boss Bernd Leutner.

The pressure on the big cities, however, could ease somewhat. According to a forecast by the Hamburg Gewos Institute for Urban, Regional and Housing Research, the population there is unlikely to increase as much in the coming years. Cities like Stuttgart and Düsseldorf, but also booming Munich, are growing more slowly – as more people are moving to the surrounding area and the immigration of foreign skilled workers is decreasing in the pandemic. "Companies are careful with new hires, and travel restrictions have slowed mobility," says Gewos managing director Carolin Wandzik.

New construction does not meet the objective

If the real estate boom continues, it would be the first time in decades that an upturn in the housing market has continued despite a deep recession. There is much to be said for it, says Gewos. The main drivers of the boom remained intact despite the corona crisis. "These include the high demand for housing due to demographics, the lack of building land and properties as well as the low interest rate level coupled with a lack of investment alternatives in uncertain times."

"The short-time working has dampened the economic consequences of the pandemic and the crisis hit low-income workers in particular," explains economist Mitropoulos. As a rule, however, they rarely bought real estate anyway. In addition, some major investors left their hands off hotels, retail properties and offices during the Corona crisis and relied more on the housing markets, which are considered safe. In addition, the new building falls short of the federal government's goal of building around 375,000 apartments a year. The housing shortage will not change in the foreseeable future. After all, the rise in construction prices is ebbing.

With the start of vaccinations against the coronavirus, the economic outlook brightened, says Mitropoulos. As a result, the situation on the labor market should improve again, which will also support the housing markets. "I don't see a big break."