Have the prices in the housing market peaked

Real estate bubble: will you still invest in real estate in 2021?

Lana Iliev, January 7th, 2021

Market participants speculate that prices will continue to rise, but once prices have peaked, they fall rapidly and the real estate boom comes to an abrupt end. In this case one speaks of the bursting of the real estate bubble. Economic and monetary policy consequences of a burst speculative bubble can be felt globally.

There can be many reasons for the price increase, which is decoupled from the actual material value. In the past few decades, for example, property bubbles have emerged in the USA, Spain and Japan lower interest rates and looser conditions for lending.

2 | When are properties overvalued?

Rising real estate prices alone cannot be classified as blistering. It only becomes dangerous when the prices are higher than the real value of the goods. In this case, it is not certain whether the acquired properties can be sold profitably at a later point in time or whether losses are to be expected as a result of the sale.

The main indicator of an overvalued property is that Ratio of the purchase price to the rental payments. The real property value can often be derived from the rents. If the purchase price is higher than the expected rental income in a certain period of time, this reduces the return on individual properties. These could therefore turn out to be overrated.

Real estate experts use the so-called multiplier to make an initial assessment of whether a property is valued too highly.

The rapid rise in purchase prices compared to the rental level within a, for example, regionally limited real estate market is considered a Signs of a housing bubble.

3 | What happens when a real estate bubble bursts?

If there is a real estate bubble, purchase prices rise until the bubble bursts. At the end of the real estate bubble, real estate prices peak, then they plummet. When a speculative bubble ends, it often sets one Downward spiral in progress: if the price drop begins, it often triggers further panic sales and thus promotes a constant price decline.

When the bubble bursts on the real estate market, it always leads to the fact that Real estate prices are falling. But it can also do this macroeconomic impact to have. This case occurred in 2007 when frivolous home loans in the United States sparked a global financial crisis.

But almost every crisis can also give rise to certain opportunities. So there is after the real estate bubble burst favorable entry opportunities in the real estate market. However, it is questionable here whether and to whom the banks are granting real estate loans at this point in time and when the right time to start has come.

4 | Is there a threat of a real estate bubble in Germany?

A study by the DIW (German Institute for Economic Research) from August 2019 uses artificial intelligence to examine the probability of real estate bubbles in various countries. The economists come to the conclusion that the immense price increases for houses and apartments as well as other factors in many OECD countries point to the formation of real estate bubbles. Buyers in metropolitan areas in particular are currently struggling with the rise in prices.

In addition, the danger of a real estate bubble in Germany has been a topic of discussion in the media for some time. Expert statements such as "The traffic light is yellow." (Andreas Dombret, board member of the Bundesbank, May 2017) with regard to a Real estate bubble in Germany fuel the discussion. But what actually speaks in favor of a real estate bubble and what, perhaps, against the danger of a bubble?

What are the arguments in favor of a real estate bubble?

That the Purchase prices have risen sharply, especially in metropolitan areas such as Munich, Hamburg and Berlin. Often prices are also rising faster than rentsthat should be kept moderate through tenant protection and rental price controls.

In addition, there is the low interest rate level due to the zero interest rate policy of the ECB (European Central Bank). There is therefore a fundamental risk that the currently cheap loans that are taken out to buy real estate will become more expensive in the future and may not be able to be repaid. This would mean that many real estate objects would have to be forcibly sold. The supply would go up and that House prices would go down.

Another indicator is that the development of the real estate market is also viewed critically by politicians. This is shown by the enactment of a new law in 2017, which gives BaFin (Federal Financial Supervisory Authority) new instruments with which it can intervene in the real estate market in the future Speculative bubbles to prevent or contain.

What speaks against a real estate bubble?

Seize the law and the BaFin Acting at the right time could prevent a large housing bubble from developing in the future. Because low interest rates and high purchase prices alone do not necessarily lead to a real estate bubble. In the past, there was often the reckless granting of real estate loans by banks that could not be repaid later.

The best-known example here is through so-called Subprime lending Real estate bubble created in 2007. The loans were given en masse to low-income earners with poor credit ratings in the USA in order to finance their own homes. Ultimately, they led to the bankruptcy of Lehman Brothers and a global financial crisis.

The frivolous granting of credit cannot currently be determined in Germany. The economists of the DIW study mentioned at the beginning also come to this conclusion: Real estate purchases in this country are quite solidly financed - at least that is what the development of the loan volume and long-term fixed interest rates suggest. Although most of the loans taken out by private households in this country are used to buy real estate, the financing is often secured by sufficient equity.

A relatively strict assessment of creditworthiness by banks can also be determined in Germany. This could also be reinforced in the future by interventions by BaFin, as it could set an upper limit for real estate loans on the basis of the new law and stipulate repayment periods.

This means that there are no signs of financing problems for real estate loans like in 2007 in the near future.

In addition, many buildings are currently being built, but at the same time there is also Housing shortage in metropolitan areas. It is often criticized that the newly built apartments are insufficient and that not enough is being built in major German cities. The lack of living space and thus the increased demand in cities will likely continue to exist in the near future.

At this time does not indicate a speculative real estate construction down. Ultimately, this means, above all, that property prices could fall in the future, but immense losses in value are unlikely given the current situation.

Although the DIW study currently confirms a high risk of bubbles in Germany, it also predicts a slight weakening of the risk in the near future. The reason for this, in addition to the solid loan financing, is the slowed property price development in large cities, which was also observed by real estate market analysts.

When will the real estate bubble burst?

Is there a real estate bubble or is it developing, the most important question is: When does it burst? Although real estate prices are currently high, it is questionable whether a real estate bubble will burst spectacularly in this country. The somewhat more moderate but definitely justified question is rather: When will real estate prices in Germany fall again?

It is believed that prices will fall as soon as the ECB raises the key rate and rates rise again. There is an obvious connection here: Low interest rates lead to the availability of cheap loans, which many people use to buy real estate in order to fulfill their dream of owning a home.

At the same time, however, low interest rates mean that traditional ways of investing money, such as federal bonds, have become quite unattractive. Real estate investments are therefore attractive capital investments in times of low interest rates. When interest rates are low, money has always flowed en masse into the real estate market.

If interest rates rise again, fewer people will theoretically be able to afford a loan for their own home and more people will want to invest their money in other ways. This means that less money will flow into real estate and, in the long term, demand will fall, which in turn will lead to falling prices.

5 | Is it still worth investing in real estate in 2019?

The real estate market has heated up and prices have been rising for some time, but the fact remains: Real estate is still one of the few asset classes that are currently still generating attractive returns. (Which not least leads to the immense demand and the inflated real estate prices.) Despite the discussion about a real estate bubble, the investment does not seem completely absurd.

Buy real estate objects

Real estate bubbles show that not all material assets are the same. If overpriced purchases are made, the buyer must expect a loss of capital. That's why you shouldn't buy a pig in a poke. Do some research on the property's value and look at the rate of return to be sure the property is not overvalued.

The type of financing is also important. If a real estate project is financed with a high share of equity, this allows leeway. In case of doubt, the property can be held until property prices climb higher again. In the case of loan financing, on the other hand, unforeseen difficulties can arise when repaying the real estate loan. This in turn can lead to increased pressure to sell at an inopportune time.

Real estate as an investment

Do you want to Real estate investment the question rightly arises: Where can you still find good interest rates?

In 2017, a number of open-ended real estate funds decided not to sell any new shares for the time being. The reasons were on the one hand the immense demand and on the other hand the lack of good investment opportunities on the real estate market. However, due to their immense risks, closed-end real estate funds do not offer a real alternative.

A sensible alternative, with which you can invest diversified in real estate, is the crowdinvesting in real estate, like BERGFÜRST mediates. On the online platform, new real estate projects are regularly presented by experienced real estate companies and financed by many investors, the so-called crowd.

As an investor, you can independently weigh up the risk of the individual real estate projects and invest free of charge from € 10. The duration of the projects is between one and five years and fixed interest rates are agreed, which are usually between 5.0% and 7.0% p.a. lie.


Discover BERGFÜRST now!


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