German Real Estate Market: Are Homes Overvalued?

Despite a recent price drop, Bundesbank reports that German homes are still overvalued. Find out more here.

German homes continue to be overvalued despite a recent decrease in prices, as highlighted by the country's central bank in a report released on Monday. The housing market in Germany has been experiencing a significant downturn following a period of rapid inflation that led to interest rate hikes by the European Central Bank (ECB). Additionally, the economy has been impacted by rising energy costs and sluggish export growth.

According to industry data, the price of owner-occupied residential properties dropped by over 4% last year, with the German statistics office reporting a decline of 8.9% in the first nine months of the year. Despite these price corrections, the Bundesbank estimates that housing prices are still 15-20% higher than they should be based on the country's current demographic and economic conditions.

The Bundesbank's monthly report also highlighted that the price-to-income ratio remains 20% above its reference value, indicating a continued overvaluation of the housing market. Furthermore, the relationship between property prices, interest rates, and incomes suggests an overvaluation of between 10% and 15%. In German cities, the purchase price to rent ratio is 20% higher than its long-term average, leading to an increase in demand for rental properties.

As a result of the high cost of homeownership, renting has become a more attractive option for many individuals. Data from property consultants and analysis firms show that renting a city flat has become 5.5% more expensive, while new lease contracts for multi-family homes have seen a 6.3% increase in costs. With the ECB expected to cut rates this year, there may be some relief for potential homebuyers in the near future.

The housing market in Germany continues to face challenges due to overvaluation, high price-to-income ratios, and increasing rental costs. While recent price corrections have occurred, there is still a risk of further adjustments needed to align with the country's economic conditions.