The world has changed massively. And not just since or with Corona. The supply chain, production and material problems created by the pandemic are now being compounded by geopolitical uncertainties and dislocation caused by the war in Ukraine. The war in Ukraine has led to lasting and severe distortions in the energy market, which in turn has driven inflation to new, unprecedented heights. Central banks around the world are now counteracting this with rate hikes to get inflation under control.
After an approx. 14-year boom in the German and especially Berlin real estate market, the bull market now appears to be over. The historically low interest rate level of well below 1% for financing a property is history, which has currently had a strong impact on the private real estate sector in particular and the construction industry in general.
My thoughts below are primarily based on my experiences in the Berlin real estate market, but they also coincide with the situation in other German sub-markets.
Private real estate buyers have put a purchase on hold for the time being or are increasingly examining the options available to them. This ranges from adjustments to your own search parameters such as shifting preferences in terms of location and size. The main reason, however, are the greatly changed financing costs, which have multiplied and therefore made buying real estate a long way off for many. Especially in the segment of first-time buyers and in the range up to approx. €800,000-€1,000,000, the market experienced a kind of emergency braking and a complete slump. Only customers who have already been in financing talks with the prospect of reasonably tolerable interest rates below 3% and those who have been able to increase their equity base significantly are currently among those who are still buying. But even with this clientele, especially in the new construction sector, reversals are increasingly occurring, since new construction projects can only be completed with a very long delay due to the existing difficulties on the construction side and the buyers get into great difficulties as a result of the commitment interest conditions.
Is there still a market for luxury real estate?
The most active buyers, if one can speak of them at all in view of the current market dynamics, are those in the upper market segment. These customers generally have a very healthy equity base and very good reserves and/or investments that can be used for the purchase if necessary. For this group of customers, the market currently offers the greatest opportunities to make an interesting purchase. In what I call the lifestyle real estate segment, substantial discounts can sometimes be achieved through price negotiations. Sellers know about the situation on the market and are not averse to a quick sale, even at a discount. The interests of both customer groups, buyers and sellers, are reunited here, because the available capital is not only used for possible economic security, but also to make attractive and lucrative investments on the stock markets. However, this again highlights a current problem on the buyer's side, because they are carefully considering whether to invest in real estate or in another investment where the prospects of large profits appear tempting. Especially since the customers do not feel any real housing shortage.
However, one cannot (yet) speak of a massive collapse in selling prices. This can change quickly, depending on how the global security situation and the resulting situations change, but currently one can only speak of a sideways movement, with the possibility of reducing purchase prices due to negotiations. This happens mostly with such real estate offers, which were already priced very optimistically in the run-up due to the still recently prospering market. These maximum prices experience the largest damper, which also leads to a certain market normalization.
Since buyers generally find it more difficult to obtain financing and banks are even more restrictive in their assessments, purchase prices will have to normalize in order to generate sales. It should be noted that top-end luxury properties continue to sell as long as the parameters of the property match those of the prospective buyers. However, the requirements of the clients are very high and can only be matched in very few cases. In the course of inflation hedging of private assets, the preceding described properties are purchased, however. The increased sales cases of so-called Blue Chip Real Estate Assets are to be observed above all in Lifestyle stressed locations, straight in the international context. Despite purchase price reductions of several hundred thousand up to millions we speak nevertheless of maximum prices which are obtained.
In my opinion, the market will not calm down until the summer of 2023, provided that the geopolitical uncertainties do not worsen and the Ukraine war hopefully comes to an end soon. Corona, which is once again hanging over us like a sword of Damocles, will hopefully not have a serious impact like in 2020/2021, which means that global economic problems should also ease further. Supply chain, production and material problems will be resolved and the way out of the recession will thus be paved:
However, I do not believe that we will return to historically low interest rates as in recent years in the foreseeable future. After discussions with bankers and financiers, I assume that we will have to adjust to an interest rate level of around 3-4%. In my opinion, the current loss of prosperity of the Germans is mainly due to the loss of these historically low interest rates and the resulting decrease in the consumer mood to spend money. There is no doubt that we will still have one of the highest levels of prosperity in the world after these current difficulties, but this will be at a much more financially healthy level than at the height of the low interest rates.
Is it worth waiting until the end of 2023 to buy?
As always, it depends. With a solid equity structure and financing, nothing should stand in the way of a real estate purchase, especially since, as mentioned above, price negotiations can be conducted very successfully.
Changes in demographic factors with predicted high immigration rates, especially for Berlin (reaching the 4mio population has thus been brought forward to about 2035), coupled with the problems in the construction industry and the resulting shortage of housing supply, are very unlikely to cause prices to fall. Price increases are almost certainly to be expected. This is likely to affect the owner-occupier market in particular and tend to push up purchase prices, or make sellers less willing to renegotiate purchase prices. The new normal will be higher interest rates and, as a result, only solvent and higher-income buyer groups will have the opportunity to purchase residential property. All in all, perhaps also in the sense of a "healthy" financial system.
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