Will the real estate bubble burst in 2023?

Some real estate experts in Germany see signs of a real estate bubble. Whether it truly is a bubble is a matter of debate among experts. What are the arguments for and against it? And what would the bursting of such a bubble mean for owners and prospective buyers?

When demand for real estate rises, real estate prices usually rise as well. At some point, the prices that prospective buyers are willing to pay become decoupled from the actual value of the property. At a certain point, for example, because interest rates on mortgages have risen, prospective buyers are no longer willing or able to pay these prices for a property. If demand for real estate then collapses suddenly and rapidly, this is referred to as a bursting real estate bubble.

What are the arguments for a real estate bubble?

In recent years, extremely low interest rates have driven up property prices sharply. The subsequent rise in interest rates has led to a decrease in demand for real estate in some areas, which in turn has caused price declines. Furthermore, according to the Bundesbank's assessment, real estate in Germany was overvalued by between 25 and 40 percent in 2022. Consequently, the Bundesbank warned of a potential bubble bursting and is preparing measures in anticipation of such an event.

Some political measures are also seen by experts as indicators of a real estate bubble. For example, the Federal Financial Supervisory Authority (BaFin) has introduced stricter rules for banks. Since April 1, 2022, these banks have been required to accumulate an additional capital buffer as a precaution against potential downturns in the following 12 months.

What are the arguments against a real estate bubble?

The current situation on the German real estate market argues against a bubble. Despite decreased demand, it still exceeds supply. This is unlikely to change quickly, as there is still a nationwide shortage of 700,000 apartments, and new construction remains stagnant. The partial decline in purchase prices is also leading to a convergence of purchase prices and rents. Furthermore, the strict lending guidelines in Germany are counteracting the formation of a bubble.

What does this mean for property owners?

If the mortgage isn't fully paid off and refinancing is necessary, it can become expensive. Due to rising interest rates, the loan itself becomes more expensive. At the same time, the loan terms could be less favorable because the property value has decreased. If the property has to be sold, the price it fetched could be lower than the purchase price.

What does this mean for potential buyers?

Generally speaking, falling prices are not a disadvantage for prospective buyers. However, timing is crucial. If interest rates continue to rise, financing real estate will become more expensive.

Real estate experts therefore recommend that both owners and prospective buyers seek advice from a local, reputable real estate agent. They are most familiar with current market trends.

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Notes

For the sake of readability, this text uses the generic masculine form. Female and other gender identities are explicitly included where relevant to the statement.

Legal notice: This article does not constitute tax or legal advice for any specific case. Please consult a lawyer and/or tax advisor to clarify the facts of your individual situation.

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