By Indradip Ghosh
BENGALURU German home prices will fall more than previously thought this year and next as high interest rates sap demand, according to analysts in a Reuters poll who expect the supply of affordable homes to worsen and ownership to decline in years ahead.
Once-booming property prices in Europe's largest economy have declined over 10% since they peaked last year as the European Central Bank hiked interest rates by 450 basis points in just 15 months, ending an about decade-long era of rock-bottom borrowing costs.
Those high interest rates and elevated living costs through soaring inflation in recent years have not only forced many households to choose renting over owning a home, it has also led to the worst crisis in the German property sector in decades.
With some German property developers filing for insolvency, construction activity has dropped over a third from a year ago.
The median view from the Nov. 15-23 Reuters poll of 14 property experts forecast average home prices to drop 8.0% this year and 2.8% next, steeper than the predicted 5.6% fall in 2023 and no growth in 2024 in an August survey.
"Higher interest rates forced about half of all potential buyers out of the housing market ... and therefore will lead to price reductions in the German housing market in this and the next few years," said Sebastian Schnejdar, senior real estate analyst at BayernLB.
"Moreover, there was a significant rise in the overheads for heating, electricity and communal fees, which have also increased the costs of housing for homeowners."
That bleak outlook was despite the government recently announcing a 45 billion euro ($47 billion) support package for the property sector and measures to encourage house building, including tax incentives.
With overall economic activity expected to remain weak over the coming quarters, it could take a while for the property sector to recover.
The euro zone's commercial property sector could also struggle for years, posing a threat to the banks and investors who financed it, the ECB said recently.
LAND OF TENANTS
Although 11 of 14 analysts who replied to an extra question said purchasing affordability for first-time homebuyers would improve over the coming year, 10 of 14 contributors said the supply of affordable homes would worsen over the coming 2-3 years.
Meanwhile, more are moving into rented homes, putting pressure on the market and rents are rising faster than salaries.
In the capital, Berlin, where cheap apartments were abundant as recently as a decade ago, the vacancy rate is less than 1%.
The median view of 12 property experts forecast average home rental prices to rise 4.0% or more until 2026.
Still, the proportion of home ownership to renters will decrease over the coming five years, according to 11 of 14 analysts. Three said it would increase.
"In the era of low interest rates, home ownership in Germany had become more popular but even if compared with most other European countries, Germany remains the land of tenants," said Carsten Brzeski, global head of macro at ING.
"Looking ahead, the new (higher) interest rate environment will make it impossible for more people to buy property. As a result, the trend of the last decade from tenants to landlords is over. Moreover, immigration should push up the demand for rental properties."
(For other stories from the Reuters quarterly housing market polls
(Reporting by Indradip Ghosh; Polling by Purujit Arun, Rahul Trivedi and Sarupya Ganguly; Editing by Ross Finley and David Evans)
