Real estate shock for Germany: biggest price drop ever recorded Brewery Appenzeller wants to renovate Chopfab – under one condition

In Germany, the rise in interest rates has caused what the Swiss National Bank has been warning about for years: a price rise was followed by a price fall. And the question now is: has a real estate crisis and possibly a banking crisis just started in Germany?

In an “exorbitant” rally, residential real estate prices have tripled or quadrupled since about 2009, depending on the segment, the Kiel Institute for the World Economy reports. Until the historic interest rate turnaround took place in 2022 and the European Central Bank increased the policy interest rate from 0 to 4.5 percent. Since then, prices have dropped “suddenly”.

“Real estate prices have fallen to a historically unprecedented extent in 2023,” reports the Kiel Institute. Since systematic tracking was introduced sixty years ago, house prices have never fallen so sharply.

Compared to 2022, sales prices of apartments fell by 8.9 percent, of single-family homes by 11.3 percent and of multi-family homes by as much as 20.1 percent.

However, the Kiel Institute does not consider this price drop as “worrisome”. The increase was “exorbitant” and a correction was therefore “appropriate”.

The German financial regulator is more concerned. For Bafin, the Federal Financial Supervisory Authority, a correction in real estate markets is one of the biggest risks to financial stability, it writes in a new report. The report says it is fundamentally positive if overvaluations are reduced. At the same time, a lot can go wrong.

Real estate crises become banking crises

The turnaround in the real estate market could initially have serious consequences for banks’ profits. Individual banks could default on so many loans that they could even be at risk. Banks that have previously not invested their savings broadly enough and in particularly critical markets are vulnerable.

Falling real estate prices can lead to a real estate crisis, which in turn can lead to a banking crisis. It wouldn’t be the first time. Something similar happened from 2007 onwards, when price falls in the US real estate market culminated in a global financial crisis. And the 2009 euro crisis was exacerbated by struggling property markets in Greece, Spain and Ireland.

In its report, Bafin describes what developments have been caused so far by the historic interest rate turnaround – and what consequences this could have for the banks.

High inflation means that households have less purchasing power and get less for the same money. High mortgage rates are in turn a financial blow to households that own or dream of owning a home.

That is why owning your own home is now much less affordable and the demand for it has dropped significantly. Because supply has increased slightly so far, prices are falling.

Commercial real estate as a greater risk

For the banks, all this has so far mainly been noticeable in lending. They could make fewer new loans, much less. From January to September 2023, there was a 43 percent decrease compared to the previous year. This corresponds to almost a halving. This means that the banks are missing out on significant revenues, which Bafin said “could cause economic problems for them in the long term.”

Another problem can be mortgages that are taken out at a very low interest rate. They may need to be renewed at significantly higher interest rates in coming years – and some households may not be able to bear this additional burden. Things could get worse if there is a severe recession, unemployment rises and more households default on mortgage interest.

And finally, falling real estate prices can have consequences for the banks. If their customers can no longer pay their mortgages and apartments are auctioned, they may be worth less – and the banks will no longer fully get back the money they borrowed.

These are still just risks and the banks have only modest losses on owner-occupied homes. No more loans than normal were at risk of default in the third quarter of 2023. And prices have fallen, but not yet to a dangerous extent, according to Bafin.

However, when it comes to commercial real estate, Bafin sees even greater risks. Prices for office space have already fallen by 10.6 percent compared to the year before, according to the figures for the third quarter of 2023. And in retail, where things have been declining for a while, prices have already fallen by 20 percent. percent down compared to the end of 2019.

“Whoever builds goes bankrupt”

This trend is becoming dangerous for banks that are highly specialized in commercial real estate and now have a cluster risk. As a result, they are likely to be taxed for a longer period of time and will not be able to offset this with profits in other business sectors. Bafin warns: “Individual banks with highly specialized business models or poorly chosen properties could even find themselves in trouble.”

But the interest rate turnaround is not only putting pressure on real estate prices. It could also support them – by reducing the supply of housing. Germany is experiencing a phenomenon that Switzerland knows all too well. Too little is being built. The structure is facing a “record collapse”.

The real estate industry association recently warned that there would be a shortage of 720,000 apartments by 2025, because building today is no longer worthwhile. One big reason: interest rates are too high. Because the requirements are too numerous and too expensive, the following applies today: “Anyone who builds housing goes bankrupt.”

The interest rate turnaround has a long series of consequences. In Germany you have to hope that they only hit a few banks and that the losses remain moderate. That would only be an appropriate correction of the overvaluations in a real estate market that has previously experienced exorbitant price increases. (aargauerzeitung.ch)