Acceleration or full braking on the real estate market
After years of continuous increases, property prices in Germany and Switzerland have recently come under pressure. Does the trend reversal intensify or will prices rise again soon? What can property owners willing to sell and potential buyers expect in the coming months?
The house price index of the Federal Statistical Office provides proof: The phase of significant increases in the value of residential real estate in Germany, which began with the onset of low interest rates in the euro area, has come to an abrupt end. In the fourth quarter of 2022, prices for flats as well as detached and semi-detached houses fell for the first time in twelve years compared to the same quarter of the previous year.
Hardly any region in Germany was able to escape this trend. Even in the seven largest metropoles, which have benefited most from the price dynamics in recent years, there were price reductions averaging just under three percent. Large cities of 100,000 inhabitants or more, which do not belong to a district, were hit the hardest with an average discount of around six per cent, ahead of rural areas.
The significant decline in real estate prices since mid-2022 is thus directly related to the cycle of interest rate increases initiated by the European Central Bank (ECB) in July 2022.
With the rapid increase in key interest rates, mortgage rates have risen by around 300 percent within a short period of time. Whereas in Germany an interest rate of 1 percent p.a. had to be calculated for a property loan with a ten-year fixed interest rate at the beginning of 2022, it is currently just under four percent p.a. Even higher-earning prospective buyers are withdrawing - at least for the time being - from planned or already started purchase negotiations. As the real estate consultancy Wüest Partner AG describes in its publication "Immobilienmarkt Deutschland 2023 | 1", the transaction volume for residential properties in 2022 had fallen to its lowest level in the past ten years.
The slowdown in real estate prices is also noticeable in Switzerland. According to calculations by the consulting firm Fahrländer Partner in Zurich, the market values of multi-family houses have been hit the hardest with a decline of more than ten percent. The decline in value of single-family houses and condominiums is still limited at just over one percent. With an increase in the key interest rate of 2.25%, the Swiss National Bank (SNB) was somewhat more restrained compared to the ECB (3.75%), but financing costs have also risen across the board for borrowers in Switzerland.
In Germany as in Switzerland, the reluctance of prospective buyers should continue for the time being, as their uncertainty as well as the discrepancies between the parties involved regarding price expectations cannot be dispelled in the short term. Little support is also expected from the interest rate side. Thanks to a robust labour market and an increase in private consumer spending, the economy has passed its trough in both countries at the end of the first quarter of 2023. Thus, inflationary tendencies should remain for the time being and continue to be fought by the central banks. Interest rates for fixed-rate mortgages are likely to remain at current levels in both Germany and Switzerland, which means that real estate should remain subject to intensified price pressure.
Wealthy families, for whom real estate represents a significant share of total assets, can take the current situation as an opportunity to review their real estate portfolio and the investment strategy behind it. Interesting options for action can be derived both from the value increases of past years and from the current price correction. The minimum energy standards for existing buildings announced for climate protection and the ongoing discussion about real estate taxation also offer reasons for an analysis. According to the German Institute for Economic Research (DIW), real estate in Germany is still taxed at a rather low level compared to other European countries.
Colin&Cie is happy to put you in touch with specialised real estate consultants through its network.
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