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Global Economy

Overheating, no blister?

3140 euros: That's how much the square meter of a condominium cost on average last year – an increase of around 14 percent compared to the previous year. Numbers that the so-called real estate experts, an advisory body for the real estate industry, have calculated. The experts are worried because the purchase prices have known only one direction for years – and that is upwards. The fear of a real estate bubble has been around for a long time.

"In the long run an unhealthy situation"

Clemens Fuest, economist and head of the Munich ifo Institute, does not yet see such a bubble in Germany. But real estate prices are rising much faster than rents. It is therefore also important to look at interest rates. "Interest rates have been falling for a long time and are very low," Fuest points out. "In this respect, it is justified that houses today often cost 25 or 30 times the rent – and not 15 to 20 times as it used to be."

Even the real estate experts do not want to speak of a bubble, but write in their spring report of "overheating". This is also due to the rising cost of building materials, which has made construction considerably more expensive as a result of the corona pandemic, explains Oliver Wittke, Managing Director of the Central Real Estate Committee ZIA: "That means it will be very difficult, especially in the case of properties rented out to third parties, to reduce the construction costs get it back through the rent," says Wittke. If it stays that way, this would be an unhealthy situation in the long term.

Rise in interest rates expected

Anyone who wants to build a house today also asks themselves: How expensive will the loan be? Interest rates have been very low in recent years. But experts expect an increase this year. When interest rates rise, loans also become more expensive. One reason is high inflation, which could soon force central banks to raise key interest rates.

The construction interest could also rise because the Federal Financial Supervisory Authority BaFin wants to ensure that German banks build up a safety buffer in the event of loan defaults. These costs then also affect borrowers. What is important now is how the credit volume and real estate prices develop, says ifo boss Fuest: "It becomes particularly dangerous when real estate is very, very heavily leveraged and when the prices then go down a bit, the banks say to the customers, ' you have too much debt, you have to sell'. This can result in a downward spiral in prices."

However, there are some indications that prices will continue to rise because the supply of apartments remains scarce. Around 315,000 apartments are said to have been completed last year. The federal government wants to increase the number of new builds to 400,000 apartments per year. However, according to the real estate experts, this goal will only be achieved in the next legislative period. Currently there is a particular lack of housing for families and social housing. Politicians are now asked to create the right framework conditions.

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