For the Price to Return to an Equilibrium Point, It Must Fall by 25%

Author: Vicente Nieves
Source: El Economista

The real estate market has begun to cool rapidly in several eurozone economies, including Germany. The interest rate hikes by the European Central Bank (ECB) and the economic slowdown are complicating the acquisition of housing for families and investors. Additionally, experts believe that this trend has only just begun and that, considering current profitability ratios, property prices in Germany should fall by up to 25% to reach a certain market equilibrium.

During the boom years, real estate investment in many German cities offered a net rental yield of approximately 3%, financed with an average mortgage rate of 1%. In other words, investors who acquired a property through a mortgage obtained a net return of 2%, a real “sweet deal” in an environment of zero or even negative interest rates for those with large amounts of liquidity.

Jochen Moebert, a Macroeconomic analyst at Deutsche Bank, explains in a note that “this offered a very positive cash flow. Investors could easily leverage this to achieve double-digit returns. Now, with mortgage rates clearly above 3%, the tide has changed.