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Real estate bubble in Germany: is it threatening or not?

Never before has the dream of owning your own property been so close. Because thanks to low interest rates, many people in Germany can currently afford a building loan and thus real estate. The problem: In some regions of Germany the real estate market is empty. The demand is great, the supply is small. For some experts, this is a clear indication of a real estate bubble in Germany. But is it really threatening? And what happens when a real estate bubble bursts? We did some research.

Real estate bubble in Germany: is it threatening or not?
Real estate bubble in Germany: is it threatening or not?

Real estate bubble in Germany: the most important things at a glance

  • A real estate bubble is a speculative bubble in the real estate market.
  • It can arise when demand for real estate exceeds supply.
  • Property prices then skyrocket.
  • When they have reached their peak, they crash. The bubble bursts.
  • According to current estimates, there will be no real estate bubble in Germany in 2021.

What is a real estate bubble and how could it develop in Germany?

A real estate bubble is a special form of the speculative bubble in the real estate market. It arises from an imbalance between supply and demand. That means: many prospective buyers compete for a few properties. This increases prices. If the real estate price is higher than the real value of the house, it is considered "overvalued". But a real estate bubble is not only due to high prices. A lot has to come together for a speculative price bubble to form:

  • Too little is being built and too much is being bought.
  • More and more investors are bustling into the real estate market and buying what they can get. The supply situation is deteriorating increasingly.
  • Real estate prices are skyrocketing and exceed the real value of the property (overvaluation).
  • Buyers are willing to pay almost any property price and take out large loans. They speculate that prices will continue to rise and that at some point they will be able to sell the property on for a profit.
  • The banks do not counteract this - on the contrary: they even grant loans to customers with poor credit ratings.

The following applies: The more of these "symptoms" occur simultaneously and nationwide, the more likely a real estate bubble is in Germany.

What phases does a real estate bubble go through?

Experts such as economists were able to identify five phases in the development of the price bubble in the past:

  1. Relocation phase:The demand for real estate is increasing. This happens, for example, through historically low interest rates for building. People then shift their investments - away from stocks and savings accounts, which you liquidate, towards their own home.
  2. Boom phase: Word gets around that real estate is a "foolish" investment. Demand is increasing and with it real estate prices.
  3. Phase of euphoria: Prices keep rising. Investors only pursue one goal: Buy as many properties as possible in order to later sell them on at an even higher price. Possible risks are not taken into account.
  4. Phase of "financial hardship": The bubble bursts, prices plummet. Banks give out fewer loans. There are foreclosures and panic sales.
  5. Phase of disgust: Buyers and investors lose interest. Due to the low demand, real estate prices continue to fall.

Real estate bubble in Germany: who would be responsible?

As a rule, there are two responsible persons when a real estate bubble emerges: the state or the banks. In the case of a "fiscal-induced" real estate bubble, the tax authorities have taken certain regulatory measures to ensure that supply and demand diverge. If, on the other hand, the banks are to blame, one speaks of a “credit-induced” property bubble. In the past, this was often triggered by the fact that banks were far too loose in lending - as, for example, during the 2008 financial crisis in the USA.

What causes a real estate bubble to burst?

The demand for real estate currently exceeds the supply in Germany. When a real estate bubble bursts, the situation is reversed: supply is greater than demand. The following scenarios can lead to such a reversal:

  • Buyers are put off by inflated prices: Prospective buyers are not willing to pay more for a property that is worth less. Sellers look in vain for potential buyers and are forced to lower the purchase price.
  • More is being built: More construction activity leads to more houses and apartments in the real estate market. This will cause real estate prices to drop.
  • Interest rates are rising: Rising interest rates lead to additional financial burdens for buyers. Fewer people are interested in their own real estate. You simply cannot afford it.
  • Banks lend less: The higher the purchase price, the more equity the banks usually require. When prices are at their peak due to a real estate bubble, it becomes difficult for many borrowers to raise the required equity. Many building loan applications are therefore rejected.
  • Borrowers are over-indebted: Many homeowners can no longer pay their monthly payments and are forced to sell their home.
  • Demand is falling for another reason: For example, because many buyers are expecting falling property prices at the same time and no longer want to invest. That actually leads to lower real estate prices.
Special repayments can help you pay off your loan faster. However, the bank can also charge higher interest rates for this.

Burst real estate bubble: what would the consequences be for Germany?

According to experts, a burst real estate bubble could have devastating economic consequences for Germany and trigger a real chain reaction on the real estate market: because interest in real estate suddenly ends, real estate prices fall. Investors are turning their backs on the real estate market and there is an “oversupply” and an extreme drop in prices.

Have you already paid off your property? Then you have nothing to worry about. However, if you want or have to sell your property after a real estate bubble has burst, you have bad cards because of the loss in value. Follow-up financing could then also become a problem.

Example: A few years ago a man bought a house for 400,000 euros, renovated it and wants to sell it on. Because of the drop in prices on the market, he would now only get 300,000 euros for it. So he decides to keep the house. A new problem is already emerging: the bank wants to protect itself in the crisis. She re-evaluates the property and demands higher interest rates and more equity for the follow-up financing. The homeowner can no longer afford the expensive monthly rate. He has to sell the house with heavy losses. Even worse: there is a foreclosure auction.

Are we threatened by a real estate bubble in Germany?

A horror scenario that worries many Germans. But the Landesbank Baden-Württemberg (LBBW) gives the all-clear. She took a closer look at the studies carried out by various institutes and experts. Their conclusion: "Despite the variety of approaches, most institutes come to a similar result, namely an increased overvaluation or an increased risk of a bubble in recent years, which is not classified as immediately alarming." Many experts agree with this assessment.

The fact is: In major German cities, rents and property prices have exploded in recent years. The supply of living space is scarce, but building interest rates are lower than ever. But while the real estate market is overheated, especially in big cities, you feel relatively little of it in the countryside. So there can be no talk of a real estate bubble in all of Germany. You can read in the following section which signs speak against a real estate bubble in Germany and what speaks for it:

That speaks for a real estate bubble in Germany

  • The European Central Bank (ECB) has triggered a rush of potential buyers on the real estate market with its low interest rate policy and the resulting trend towards lower building interest rates.
  • Real estate prices in major German cities and metropolitan areas are rising and rising.
  • Investments are no longer worthwhile due to the low interest rates. Therefore, more and more people are investing in real estate.
  • Too little is being built, although the demand is very high.
  • The German federal government ensures that demand and prices continue to rise - for example through the construction child allowance, which is used more for existing properties than for new buildings.

That speaks against a real estate bubble in Germany

  • The following applies: the faster the gross domestic product grows, the greater the risk of a real estate bubble. Due to the corona crisis, however, the gross domestic product in Germany fell by five percent in 2020 compared to the previous year.
  • It is true that real estate prices are also rising in rural areas, but there they are within a reasonable range compared to the metropolitan areas. That speaks against a real estate bubble in Germany.
  • The relationship between purchase prices and rents is balanced in most cities in Germany. Their interaction is very important for the real estate market.
  • When granting loans, banks make sure that borrowers can repay the loan within the specified term - for example with sufficient equity, long fixed interest rates and high repayment rates. So lending isn't too loose, which reduces the rush on the property market.

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Real estate bubble in Germany: no need to worry

Even if there are indications of a real estate bubble - these often only occur regionally and not nationwide. If you look at the real estate market from a market economy perspective, it is developing completely normally. High demand leads to rising prices and a lower supply. Even the corona pandemic does not allow the house of cards to collapse or a possible real estate bubble to burst - on the contrary. Research shows that the lockdown has made people want to have their own house even greater.

Above all, experts always keep an eye on the banks and their lending. It is considered to be one of the most important indicators of a real estate bubble. Many of them still have the financial crisis of 2008 in the back of their minds: At that time, 25 commercial banks had to close due to a burst real estate bubble. This was due to questionable loans and the associated mass foreclosures. However, German credit institutions are very conscientious when it comes to financing real estate.

How will the real estate market develop in Germany?

Rising prices, high demand and low interest rates - experts assume that this trend will continue over the next few years. The observers expect a further but much slower price increase in metropolises like Munich, Berlin or Hamburg. Most experts therefore agree: there will be no real estate bubble in Germany.

Therefore, the following still applies: Anyone discovering an affordable dream home should get hold of it as soon as possible. Because real estate prices will continue to rise - unless the ECB radically changes its low interest rate and raises key interest rates. Then the Germans would perhaps put their money back into the traditional savings account. The lower interest in buying would then lead to falling property prices. But experts consider this interest rate turnaround by the ECB to be very unlikely.