Corona pandemic ends German real estate boom

The corona pandemic not only ensures the lockdown of economic activity, it also puts an end to the roughly ten-year boom on the German real estate market. Previously, the smoothly running economy, growing employment and falling interest rates had lifted property prices to what were in some cases high levels. Since 2009, prices for owner-occupied residential property have climbed by 55 percent across Germany, doubling in the seven largest cities. In the case of commercial property, rental yields have halved to less than 3 percent. However, even before the outbreak of the Corona pandemic, the real estate market was no longer running smoothly. In the case of apartments, the rise in prices and rents slowed down, especially in expensive cities. In addition, new regulatory interventions are making the letting business more difficult. Rents are already falling in the retail sector.

If a short recession and a strong recovery remains, thanks also to the aid packages of the ECB and the government, the real estate market as a whole should get off with a „black eye“. Housing demand will not change as a result of the crisis. Essentially, that also holds true for offices, if there is no major job loss. Logistics could even benefit from the growing online shopping and increasing stockpiling. In these market segments, supply is so scarce due to the low volume of new construction that there is no threat of oversupply even if demand falls.

However, landlords must prepare for rent losses as a result of unemployment or short-time work and falling sales revenues. The latter primarily affects the retail sector. Due to successful online shopping, quite a few retailers are financially strapped anyway, so that there are no reserves to bridge the lockdown. The situation is even bleaker for hotels that cannot even hope for catch-up effects. Moreover, the corona crisis could have a more lasting effect on the real estate market than previous recessions. It is driving digitization overall and the flexibilization of the working world. Home offices could become the standard and reduce the demand for office space, while online shopping could grow even faster and put a greater strain on traditional retail trade than before.

The usually scarce supply of real estate and the probably still low interest rates reduce the danger of falling prices. Price declines are most likely to occur in the already expensive large cities. In the future, buying property should remain attractive for private users, since financing rates are often lower than the rent. Investor demand should also stabilise, despite poorer letting prospects. The investment problem has not been solved in view of negative bond yields and high uncertainty on the stock markets. In the housing market, the moderate level of debt of private households also reduces the risks. However, a prolonged economic crisis is likely to have a sustained negative impact on the real estate market and would have the potential to cause prices for apartments and commercial property to fall noticeably. Credit defaults and dwindling collateral values could cause losses in the financing business.

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