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German real estate is likely to become more expensive after the Corona crisis

The Corona crisis will probably go down in the history books as an extraordinary descent. Now that it is clear that the real estate industry is not spared economic damage, including losses in value, it is now much more interesting to find out to what extent long-term development will be affected.

According to a Statista index, real estate prices in Germany continued to rise steadily in the first quarter of 2020. However, this does not prove that the real estate market is completely immune to the corona virus. The economic impact is likely to affect the segment with a certain delay, so that the current imbalance cannot yet be seen directly from the prices.

Economic weakness lowers house prices

The consequences of the corona crisis are well known. Due to the necessary shutdown of social and economic activities, many market players suffered significant losses. The doldrums affect the owners and employees of the stricken companies and businesses. A lack of income ultimately leads to short-time work and, in the worst case, even to unemployment. Ultimately, there are no important capital flows on both sides, so that less money is available.

This of course also affects the real estate sector. In times when income is threatened or scarce, expenses are reduced as far as possible and no larger purchases are made. The purchase of a property thus takes a back seat. In addition, the economic boom of many companies was an important factor for the increased influx into the metropolitan areas. Promising job offers attracted people to the cities and caused demand to rise. This development came to an abrupt end with the Corona crisis. But it is not only the lack of transactions that causes prices to shrink. As Deutsche Bank writes in an “Outlook on the German Real Estate Market 2020”, some citizens are temporarily forced to sell their homes in an emergency due to job loss or risk-taking financing. The experts are therefore anticipating noticeable price declines, although they do not quantify them more precisely.

Corona crisis is only a brief low in the real estate industry

The sustainability of the negative effects cannot be exactly determined, but can only be estimated. However, it is not expected that the Corona crisis will turn out to be the anchor that will drag the real estate industry down into the abyss after a long flight. Rather, the forecasts assume a brief interruption, which cannot stop price growth from continuing. Deutsche Bank foresees “only a‘ corona-related ’break and not yet an end to the price cycle”, because “all the structural factors that shaped the cycle from 2009 to the beginning of 2020 continue to work”. The bank sees these factors as essentially two basic driving forces. On the one hand, this includes the persistent high demand for housing, which cannot be met by the sluggish supply. After all, the corona crisis did not suddenly meet the need for living space, but only temporarily suspended it. Secondly, it is the low interest rates that fuel the market with cheap loans. For example, “The credit cycle jumped strongly in 2019, which could initially increase house and apartment prices even more dynamically”.

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Even if one is not convinced that the move into the metropolitan areas will experience a rapid restart, this does not ultimately lead to a downturn for the real estate industry. Especially in the Corona crisis, the surrounding area shone with its area-specific advantages. These are not only hidden in the cheaper prices, but also in the idyll and freedom of country life. While the Corona crisis literally crammed residents of narrow metropolitan areas into their homes, the rural areas convinced with a better compatibility of foreclosure and leisure activities. In addition, a number of cultural and social offerings, which otherwise make up the flair of cities, had to close due to the pandemic, which, according to Focus Online, has made less densely populated regions more attractive. Since the virus will be with us for some time and certain restrictions will remain, a shift in housing demand and an increase in prices in the surrounding area can therefore be assumed.

Last but not least, the confident future outlook is based on Germany’s historical stability. According to Deutsche Bank, it has been shown in the past that Germany is particularly successful in coping with crises by international comparison. This quality now comes into play again in the corona pandemic. The spread and severity of the disease took a far more mild course in Germany than in many other countries. In addition, Germany can draw on full financial reserves to remedy the economic consequences. The imbalance of companies and households could therefore quickly be overcome, so that the real estate market only has to experience a short dry spell. In its analysis, Deutsche Bank wrote: “In perspective, we therefore believe that a relatively manageable crisis with rapid recovery and price normalization is more likely than a deep, long-lasting crisis with little and late recovery.”

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