German residential property market faces risk of price drop

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German residential property market faces risk of price drop - DIW study

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© Reuters. FILE PHOTO: Facades of apartment buildings are pictured at Schoenberg district in Berlin, as the spread of the coronavirus disease (COVID-19) outbreak continues, Germany, November 12, 2020. REUTERS/Fabrizio Bensch

BERLIN (Reuters) - The German residential property market faces a growing risk of price corrections, the DIW research institute said in a study released on Wednesday.

"We are not facing the bursting of a huge real estate price bubble in Germany," the report's co-author Konstantin Kholodilin said. "But price drops of up to 10% for owner-occupied flats and owner-occupied homes are quite possible."

According to the study, prices for owner-occupied homes and flats in 97 cities surveyed across the country have risen by an average of 11% this year, while rents have only increased by 4%.

"Since property purchases are refinanced by rental income - or in the case of owner-occupation by saved rent payments - property prices should develop in line with rents in the long term," it said.

In many places, rising property prices are due to high demand and low supply, the study added.

The population is growing in major German cities while too few new homes are being built due to less favourable financing conditions, increased construction costs and, in many places, shortages of workers.

"Politicians should quickly give new construction activity a boost by speeding up procedures and increasing public investment in construction," said co-author Malte Rieth.

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