Real estate bubble 2021: Is Germany facing a real estate crisis?

Rising real estate prices, high demand, favourable interest rates: the conditions on the German real estate market have media and experts speculating again and again about whether a real estate bubble will develop in Germany in 2021.

Currently, moreover, property owners in particular are wondering whether a real estate bubble will occur because of Corona and what influence it could have on the value of their property.

What is a real estate bubble?

A real estate bubble is a special form of speculative bubble, which has been seen more often in the financial markets in the past. Such a bubble occurs when buyers are willing to pay far too high a price for a certain good. In a real estate bubble, the demand for real estate exceeds the supply. Property sellers demand inflated prices for their properties, which buyers in turn accept. In this case, real estate prices significantly exceed the actual value of land and buildings. As the Immobilienmakler Kassel explains, The term “bubble” symbolises the characteristics of a bubble: a large, hollow space. The real estate market inflates more and more due to rising prices. When prices reach their peak, the bubble bursts and prices fall.

These factors favour the development of a real estate bubble:

  • Purchase prices rise much faster than rental prices in some regions
  • Interest rates are low, borrowing costs are low
  • Incomes are rising, more people can afford real estate (high demand)
  • Banks grant loans too loosely, for example as construction financing without equity capital
  • Property speculators are pushing their way into the market, especially in metropolitan areas
  • Living space in metropolitan areas is scarce, influx exacerbates the situation

What happens when the real estate bubble bursts?

When demand for real estate falls and supply exceeds demand, real estate prices fall rapidly in a short period of time. This is the case, for example:

  • when buyers are no longer willing to pay the exorbitant property prices
  • new construction activity makes more living space available
  • interest rates on loans rise, owners can no longer afford the instalments and are forced into foreclosure.

The result: even higher supply, vacancies and a progressive decline in prices – effects that many owners fear when Corona creates a property bubble.

Example of a real estate bubble

A historical example of a housing bubble bursting is the world’s largest housing crisis, which began in the US in 2007. The crisis was triggered by loans that banks had granted to property buyers with low credit ratings when interest rates were low. When interest rates rose again, many owners were no longer able to pay their interest and repayment instalments on the property loan. They were forced to sell their property. Due to the wave of sales that was triggered, property prices slid into the basement. Panic selling fuelled the downward spiral and thus the real estate crisis. German banks had also speculated on American mortgage loans and needed government support.

Only a decade after the real estate crash in the USA, low interest rates are again a global issue. For several years now, the key interest rate in Europe has been at zero percent – an absolute record low. Many investors see themselves forced to invest in the “concrete gold” of real estate instead of leaving their money in savings accounts without a profit. This demand, in turn, is causing real estate prices to rise, but so is the fear that a possible real estate bubble will burst.

What impact will a real estate bubble in 2021 have on property owners?

Fearing a property bubble caused by the corona virus, many property owners are wondering how a possible property crash would affect them personally. The answer depends on several factors: Those who have already paid off their real estate loan or mortgage have nothing to fear from a real estate crisis or the bursting of a real estate bubble in 2021. This is because they are no longer dependent on banks or the interest rate level. Owners who are not planning to sell their property and therefore do not face the risk of a loss in value would also not be affected by a property crash in 2021, for example in the event of a property bubble caused by Corona.

However, the bursting of a real estate bubble has negative effects for:

  • Owners who need follow-up financing after an interest rate increase and cannot manage the loan repayment with a higher redemption rate
  • Owners who have to sell their house or flat (for example because of divorce) and experience a loss in value.

Can I protect myself from a real estate bubble?

Anyone thinking about buying a property today wants to make sure they are protected from a property crash in 2021 and beyond. It is therefore important to carefully examine the property and its financing before buying. Buyers should pay particular attention to a long fixed-interest period for their loan in order to secure the current favourable conditions for many years. A fixed interest rate of 15 years or more is ideal.

Is the real estate bubble bursting now?

High demand for real estate – also favoured by low construction interest rates – has caused prices in Germany to rise, sometimes considerably, in recent years. Sometimes they have reached a level that a normal earner can hardly afford. For example, property buyers in the metropolis of Munich now pay more than 7,500 euros per square metre for a condominium. The Bavarian capital thus continues to be the most expensive metropolis in the country. However, prices also rose sharply in other major cities and conurbations. For example, prices per square metre for residential property in Berlin climbed by 10.5 per cent last year alone. In addition to the metropolises, numerous large and medium-sized cities also recorded enormous price jumps. For example, prices in Kleve in North Rhine-Westphalia rose by 20.7 percent, in Halle (Saale) by 17.4 percent and in Kerpen by 16.1 percent. No wonder sellers and buyers are asking themselves, especially in times of corona virus, how the crisis will affect property prices in Germany and whether a property bubble is now bursting.

But is there even a price bubble on the German property market?

A recent study by the Institute of the German Economy (IW Köln) at least sees no signs of it. One of the reasons given by the experts for their assessment is that in Germany, before the Corona crisis:

  • there was no increased construction activity in excess of demand, and
  • banks did not grant excessive real estate loans.

Nevertheless, the experts expect that future rent expectations could decrease due to “possible insolvencies and increased unemployment”, as household income is lower. This development could tend to have a negative impact on housing prices. Overall, the experts at the IW expect that property prices could fall by up to 12 percent this year due to the Corona crisis.

We do not currently see any decline in prices on the residential property market. There are many reasons to believe that prices will remain stable in the future despite the Corona virus – for example, the excess demand in metropolitan areas or the low interest rate level, which continues to make the real estate market attractive for buyers. According to experts at the IW, it is even possible that interest rates will fall even further in the future, which could lead to more favourable financing and consequently to price stability. However, how property prices actually develop depends above all on how long the Corona crisis lasts and the recession it has caused turns out accordingly. Or to put it in the words of the IW experts: “The less interest rates fall and the more severe the economic slump, the stronger the price effects are likely to be.”