Four questions for IW real estate experts: The real estate market will recover this year – German Economic Institute (IW)

In an interview with LinkedIn News DACH, IW real estate expert Michael Voigtländer talks about current opportunities in the real estate market, areas where prices could rise the most and the likely impact of lower interest rates. interest forecast by the ECB on the market.

The US Federal Reserve put the brakes on at its latest central bank meeting, while the ECB is open to an interest rate cut in June. Many real estate agents aspire to this. Do you expect a sudden recovery if interest rates fall in June?

Expectations are already built into interest rates for long-term financing, for example for 10-year fixed-rate home loans. Financing interest rates fell already in December 2023, as market participants expected changes to key rates this year. If they come now, it should have no real effect on interest rates. However, overall inflation is trending more favorably than expected. If this is confirmed, interest rates could fall a little further, but rather slowly. For the real estate market, however, this means that a sudden improvement in the financial situation should not be expected. However, the increase in new contractual rents and the new exceptional depreciation should revive transactional activity.

Many properties currently have been on the market for a long time and buyers have some flexibility. How long will this time window remain open?

I think this window will close relatively quickly. Due to the decline in housing construction, apartments are becoming even more scarce, and there is also high immigration to big cities, including urgent immigration of international workers. As new contract rents continue to rise and people become more accustomed to interest rate levels, the demand for properties to purchase will increase again, increasing competition for these properties. There are currently only a few price reductions, especially for properties located in metropolitan areas with a good energy balance. Only for buildings to be renovated in peripheral areas will there likely remain a buyer's market in the future.

In 2023, condominiums fell by an average of 5.8 percent in the seven largest metropolises, according to data from the Federal Statistical Office. According to the IfW, this is the biggest drop in around 60 years. How quickly could the pendulum swing again and in which cities could prices rise particularly quickly?

I firmly believe that house prices will rise again this year, but not as sharply as in the 2010s. The DIW only predicts 177,000 new apartments in 2025, but demand is much higher. As a result, rents for new contracts are now increasing by 6% per year, compared to 4% in 2020. This makes real estate more attractive, especially since lower interest rates can be expected at long term. Local demand, which is determined by the number of households and income developments, is also crucial for price developments. The big cities are ahead here, cities like Berlin and Munich are experiencing very strong growth. And since companies in the service sector are active there, whose development is much more dynamic than in the industrial sector, incomes are also increasing more quickly.

Anyone who bought a property almost a decade ago was able to benefit from significantly lower interest rates. At the same time, JPMorgan boss Jamie Dimon recently said interest rates could reach significantly higher levels in the long term. When financing, should property buyers now speculate on a further fall in interest rates in the coming years?

Forecasting short-term interest rates is always difficult because interest rates are largely determined by expectations, particularly regarding the evolution of inflation, short-term interest rates and general economic development. In the long term, however, it can be assumed that interest rates will fall again, because due to demographic developments in industrialized countries, in particular the constant lengthening of retirement periods, savings must constantly increase. More savings in turn means more supply on the money market and therefore lower interest rates. However, this perspective does not help those who want to invest money now or buy property for their own use. However, part of the financing could be provided with a shorter fixed interest rate in order to benefit from this development. However, this should only be implemented if the risk of a less favorable development can be tolerated, for example for geopolitical reasons.

To the interview on LinkedIn.com

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