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Real estate prices in Germany are falling more sharply than anywhere else

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Real estate prices in Germany are falling more sharply than anywhere else

Real estate prices are falling in Germany. Picture Alliance

Real estate prices in Germany have fallen by ten percent – more than in any other country. This is what economists at Deutsche Bank Research calculated.

In addition to the interest rate shock, the comparatively strict regulation played a major role.

The experts assume that the real estate market has now largely digested the higher interest rates.

Real estate prices are falling more sharply in Germany than in any other country. This emerges from an analysis by Deutsche Bank. Since 2021, houses and apartments in Germany have become on average around ten percent cheaper from their price peak, experts calculated Deutsche Bank Research. Of the 33 countries examined, prices fell in 21 countries and rose further in twelve countries during this time.

In addition to the interest rate increases, the regulation of the housing markets played an important role. House prices in the comparatively little regulated markets in Great Britain and the USA fell only slightly and only temporarily. However, real estate prices have fallen particularly sharply in countries with highly regulated housing markets. The “interest rate shock” is now likely to be largely priced in on the real estate markets, according to the experts.

Of all the countries examined, the price decline in Germany was the greatest at ten percent. In countries as diverse as Canada, Denmark, Sweden, Luxembourg and Korea, prices fell by seven to nine percent. In Australia, the Czech Republic, the Netherlands and Slovakia the decline was three to five percent.

Given the magnitude of the interest rate shock, DB Research assesses the price changes as “comparatively small”. There is also no direct statistical relationship between changes in real estate prices and interest rate increases.

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Higher interest rates and real estate prices

In countries with particularly strong interest rate increases, house prices would not have fallen more sharply. “In fact, we found no significant statistical relationship between house prices and short-term or long-term interest rates,” the economists write. In Great Britain and the USA, despite the historically strong interest rate increases at the end of 2023, house prices were significantly higher than in 2021. In between, they only fell briefly and slightly.

It is scientifically well documented that home ownership effectively protects against the risks of inflation. “Our research shows that property prices have outperformed inflation over the long term in every country in the OECD,” said Deutsche Bank. This applies in the long term despite the price and interest rate shocks of recent years.

Important factors are changes in rents and the degree of regulation. Surprisingly small price declines over the past two years suggested that inflation in developed markets was helping to cushion the price downturn. The interaction between house prices, inflation, interest rates and regulation is complex. All in all, the economists at DB Research state:

“First, if Germany had adopted the US regulatory framework before the interest rate shock, house prices would have fallen 3.3 percentage points less from Q2 2021 to Q2 2023 – just 6.7 percent from peak to trough, instead of 10 percent.” .

Second, if regulation of housing markets in developed countries were stricter in the sense that there were two additional stricter rental laws, house prices would fall an additional 1.1 percent on average.

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The results also suggested an interplay between housing regulation and monetary policy. “Countries with more regulated housing markets may need fewer interest rate increases to contain house price inflation,” the economists write. On the other hand, the risks could be greater in highly regulated rental housing markets.

Interest rates usually have a delay of twelve to 18 months in affecting the real economy. It appears clear that the global interest rate hike cycle has peaked in both key interest rates and long-term yields, economists said. The financial markets have already priced in interest rate cuts. Long-term yields in Europe fell significantly from October to the end of 2023. This was largely driven by falling inflation rates.

In addition, many countries are experiencing low economic growth, stagnation or, in Germany, even a recession. The growth prospects for 2024 are also poor for almost all countries. All of this should reduce price pressure. The economists at Deutsche Bank Research therefore agree that no further interest rate increases will be necessary. They also “expect several interest rate cuts by the central banks”.

This new interest rate environment should support property prices in 2024. Given the 12-18 month lag and the fall in interest rates, housing markets are likely to have largely absorbed the interest rate shock.

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