"Property owners have nothing to worry about."

Short-time work, bankruptcies, and a lack of planning certainty: The coronavirus crisis is causing major economic disruptions and widespread uncertainty. However, according to a recent study by the German Economic Institute (IW), property owners do not need to fear significant losses in value due to the pandemic. IW experts predict that purchase prices in Germany's 50 largest cities will only fall slightly this year.

“Property owners have nothing to worry about,” reads the reassuring headline of a press release from the German Economic Institute (IW). The authors of the study underlying this statement, IW real estate expert Michael Voigtländer and real estate economist Dr. Christian Oberst, assume that property prices will most likely not fall, or only fall relatively slightly, due to the coronavirus crisis – at least in the 50 major German cities that formed the basis of the study. “The residential real estate market will weather the current crisis relatively well,” is their optimistic conclusion.

The fact that the experts at the Cologne Institute for Economic Research (IW Köln) arrive at a completely different conclusion than, for example, the Institute for Urban, Regional and Housing Research (Gewos) or the analysts at Empirica, who predict "severe and long-term disruptions" in the housing market in light of the crisis, is also due to their consideration of concerns about a bursting real estate bubble as unfounded. According to their assessment, such a bubble does not exist: "Neither have more apartments been built in recent years than are needed, nor are there significant discrepancies between rent and owner-occupier costs – both of which would be typical signs of a real estate bubble."

The stability of purchase prices is also due to the fact that rents are hardly declining: "There is currently no indication that rents could collapse," Voigtländer states. He also draws on the experience of the 2008/2009 financial crisis: While rents are linked to the gross domestic product during boom periods, they stagnate during crises. Landlords are more likely to leave apartments vacant than to lower the rent.

A sideways movement in real estate prices is therefore a conceivable scenario. However, declining rental price expectations in light of shrinking citizens' incomes could naturally also lead to a decrease in residential property prices: "Based on potential bankruptcies and increased unemployment, future rental price expectations are likely to be reduced because households will have less income available overall." This could have a generally negative impact on housing prices, the real estate experts acknowledge.

Depending on how the German economy develops in the wake of the coronavirus pandemic, IW analysts consider a price decline of between zero and a maximum of twelve percent realistic. They do not expect a dramatic collapse, as they anticipate further falling interest rates, which will mitigate the price decline. "We consider it quite possible that mortgage rates will fall again. The European Central Bank is currently intervening massively, and a drop of 50 basis points is always possible, as the past few months have already shown," says Voigtländer. This factor, in particular, makes the real estate experts optimistic.

As soon as the coronavirus-related restrictions are lifted and planning certainty returns, investment activity in the real estate market is also likely to resume. This is further supported by the fact that the reasons for rising real estate prices in Germany have hardly changed: Housing remains scarce, particularly in large cities, and investors lack alternatives to real estate in the current low-interest-rate environment. The search for security in tangible assets is further intensified by the ongoing volatility of the stock markets.

However, the risk of a setback is higher in expensive regions: "In southern Germany, for example, a price decline could be more pronounced because rents were already relatively high compared to wages before the crisis," says Voigtländer. In locations affected by the structural changes in the automotive industry, expectations for rent increases, and consequently prices, could also fall more sharply.

The IW report was commissioned by Deutsche Reihenhaus AG.

Sources: iwkoeln.de, handelsblatt.com, procontraonline.de, welt.de