How come most Germans don't buy houses

Real estate bubble 2021:
Is Germany threatened with a real estate crisis?
Is Germany threatened with a real estate crisis?
Is Germany threatened with a real estate crisis?

Clarissa Bethke

Real estate editor

January 05, 2021 4 minutes to read

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

In addition, property owners in particular are currently wondering whether there will be one Real estate bubble due to Corona and what impact this could have on the value of your property.

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What is a real estate bubble?

A real estate bubble is a special form of the speculative bubble that has appeared more frequently in the financial markets in the past. Such a bubble arises when buyers are willing to pay far too high a price for a particular good. In the real estate bubble, demand for real estate exceeds supply. Property sellers charge excessive prices for their properties, which buyers in turn accept. The real estate prices clearly exceed the actual value of the land and building. The term “bubble” symbolizes the properties of a bubble: a large, hollow space. The real estate market is inflating more and more due to the rising prices. When prices peak, the bubble bursts and prices fall.

Interesting: The term “bubble” symbolizes the properties of a bubble: a large, hollow space.

These factors favor the development of a real estate bubble:

    • In some regions, purchase prices are rising significantly faster than rental prices
    • Interest rates are low, borrowing costs are low
    • Income increases, more people can afford a property (high demand)
    • Real estate speculators are pushing their way into the market, especially in metropolitan areas
    • Housing in metropolitan areas is scarce, and new residents are exacerbating the situation

If the purchase price of a property is as high as around 30 annual cold rents or even higher, this indicates an excessive price development and a tendency for the market to overheat.

What happens when the real estate bubble bursts?

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

    • when buyers are no longer willing to pay the inflated property prices
    • more living space is available due to new construction activity
    • interest rates on loans are rising, owners can no longer afford the installments and are forced to foreclose

The result: An even higher supply, vacancies and a continuing decline in prices - the effects that many owners fear in the event of a property bubble caused by Corona.

Example of a real estate bubble

A historic example of the bursting of the real estate bubble is the world's largest real estate crisis, which began in the US in 2007. The crisis was triggered by loans that banks had granted to property buyers with poor credit ratings during times of low interest rates. When interest rates rose again, it was no longer possible for many owners to pay their interest and repayment installments on the real estate loan. They were forced to sell their property. The wave of sales that was triggered slid real estate prices into the basement. Panic selling fueled the downward spiral and thus the real estate crisis. German banks, too, had speculated on American mortgage loans and needed government support.

Just a decade after the real estate crash in the US, low interest rates are once again a global issue. The key interest rate in Europe has been at zero percent for a number of years - an all-time record low. Many investors feel compelled to invest in the "concrete gold" property instead of leaving their money in the savings account with no profit. This demand in turn is causing real estate prices to rise, but also the fear that a possible real estate bubble will burst.

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

For fear of a real estate bubble caused by the corona virus, many owners are wondering how a possible real estate crash would affect them personally. The answer depends on various factors: Anyone who has already paid off their real estate loan or mortgage has nothing to fear from a real estate crisis or the bursting of a real estate bubble in 2021. Because it is no longer dependent on banks or the interest rate level. Even owners who are not planning to sell a property and are therefore not faced with the risk of a loss of value would 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 on:

    • Owners who need follow-up financing after the interest rate hike and cannot cope with the loan repayment with a higher repayment installment

Can I protect myself from a real estate bubble?

If you are thinking about buying a property today, you want to be sure that you are protected from a property crash in 2021 and beyond. It is therefore important here to carefully examine the property and its financing before buying. Above all, buyers should pay attention to a long fixed interest rate on their loan in order to secure the currently favorable conditions for many years. A fixed interest rate of 15 years and more is ideal.

Are you planning to buy a property? Then find out which financing options you have in just 3 minutes, free of charge and without obligation:

This is a service provided by Homeday Hyp GmbH (information on data protection)

Is the real estate bubble bursting now?

A high demand for real estate - also favored by low building interest rates - has caused prices in Germany to rise considerably in recent years. Sometimes they have reached a level that a normal wage earner can hardly afford. For example, real estate buyers now pay more than 7,500 euros per square meter for a condominium in the metropolis of Munich, as a homeday study * shows. The Bavarian capital continues to be the most expensive metropolis in the country. But prices also rose sharply in other large cities and metropolitan areas. The square meter prices for residential property in Berlin climbed by 10.5 percent last year alone. In addition to the metropolises, numerous large and medium-sized cities also recorded enormous price jumps. Prices in Kleveum 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 that, especially in times of the coronavirus, sellers and buyers are wondering how the crisis will affect real estate prices in Germany and whether a real estate bubble is now bursting.

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

A current study by the Institut der Deutschen Wirtschaft (IW Cologne) sees at least no signs of this. The experts justify their assessment, among other things, with the fact that in Germany before the Corona crisis:

    • there was no increased construction activity going beyond demand, and
    • Banks have not made excessive mortgage loans.

Nevertheless, the experts reckon that future rent expectations based on “possible bankruptcies and increased unemployment” could decrease, as household income will be lower. This development could tend to have a negative impact on house prices. Overall, the IW experts expect real estate prices to fall by up to 12 percent this year as a result of the Corona crisis.

In the case of Homeday, however, we are currently not seeing any decline in prices on the residential property market. There are many reasons that prices will remain stable in the future despite the coronavirus - for example the excess demand in metropolitan areas or the low interest rate level, which will continue 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 cheaper financing and consequently to stability in prices. How real property prices actually develop depends largely on how long the corona crisis continues and the recession it caused fails accordingly. Or to put it with the experts at the IW: "The less interest rates fall and the stronger the economic slump, the stronger the price effects are likely to be."

Are you interested in selling real estate and want to know how much your property is worth in times of the corona pandemic? With Homeday's free property valuation, you can find out quickly and without obligation:

* The basis for the investigation is the Homeday price atlas; Status: December 2019. For the investigation, the purchase prices for apartments for the 200 largest German cities between Q3 2018 and Q4 2019 were compared with one another.

Real Estate Bubble 2021 FAQs

What is a real estate bubble?

There is talk of a real estate bubble when the demand for real estate increases at an above-average rate. As a result, prices climb to an irrational level. The result is an overvaluation of properties in poor condition or in C-locations. If the real estate market calms down again, the owners usually make a loss on the sale. You can read more about the real estate bubble here.

Is the real estate bubble bursting because of the corona crisis?

At Homeday, we currently see no effect of the Corona crisis on property prices. There are also many arguments in favor of prices remaining stable. How real estate prices actually develop, however, depends above all on how long the corona crisis lasts and the recession it caused turns out accordingly. Find out more now.

What if the bubble bursts?

If this situation occurs, real estate prices fall like a stock market crash. Owners who have acquired overvalued properties can only sell them at a loss. The market is flooded with offers to sell. If a real estate bubble bursts, many houses are available as bargains. If you don't have to sell, you can wait until the market has calmed down. We explain here what to watch out for in a real estate bubble.

Will real estate prices continue to rise?

The question of whether real estate prices will continue to rise depends on various factors. One of the reasons lies in the general economy. Full employment and rising incomes make buying real estate easier. As long as residential construction lags behind demand and purchasing power, we can assume that prices will continue to rise, but not yet of a real estate bubble in Germany. We will show you how you can find a solid price-performance ratio despite rising prices.

Please note that our advice answers and articles cannot represent or replace legal, tax or financial advice. For clarification of your legal or financial matters, we ask you to consult the appropriate experts (e.g. lawyers, tax advisors or financial advisors). Despite great care and conscientious research, errors cannot be ruled out. We look forward to and are grateful for any relevant information, which we will try to implement in a timely manner.

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