Property bubble could have “significant” consequences, experts say

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Of: Florian Dorr

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Cheap money and high demand have driven property prices up. Experts now believe that Frankfurt is at the forefront of the risk of a bubble in the housing market worldwide.

Frankfurt – According to a study, Frankfurt has one of the highest risks of a property bubble in the world. According to the assessment by the major Swiss bank UBS, the Main metropolis is in second place after Toronto. In Munich, too, the housing market is severely overheated. The city ranks fourth among all 25 surveyed metropolises, just behind Zurich. “Especially investors considering buying in these regions of Germany for the sake of returns should exercise caution at the moment,” advised Maximilian Kunkel, UBS’s chief investment strategist in Germany.

In its “Global Real Estate Bubble Index” published on Wednesday (12 October), the bank has calculated a value of 2.21 for Frankfurt and 1.80 for Munich – with more than 1.5 points there is a bubble risk. Toronto, Amsterdam, Tokyo, Vancouver and Hong Kong are therefore also considered to be highly overvalued by more than 1.5 points. UBS sees London, Paris, Los Angeles and Sydney as slightly less overheated.

Property prices in Frankfurt: Main metropolis one of the world leaders in the risk of bubbles

Because of low interest rates, house prices have steadily decoupled from local incomes and rents over the past decade, according to UBS. “The cities most exposed to a bubble have seen inflation-adjusted price increases of an average of 60 percent during this period, while real incomes and rents have risen by only about 12 percent.”

In previous years, UBS had already identified acute overheating in the housing markets in Frankfurt, among others. But if you look at how much of their income qualified employees have to spend on a 60 square meter apartment close to the city centre, Frankfurt and Munich are far behind Tokyo, Hong Kong, London and Paris.

The experts at the Swiss bank UBS expect a turnaround in the long-term real estate boom. (Iconic image) © Uli Deck/dpa

In Frankfurt, UBS is now observing a cooling of the market. In the largest city in Hesse, the usual double-digit price increases have fallen for the first time in ten years, it said. “Between mid-2021 and mid-2022, property prices rose by only about 5 percentage points.” Apartment prices in Frankfurt are still more than 60 percent above the level of five years ago. The “immowelt price compass” also says: “Already in the second quarter of this year, the reduced interest in owner-occupied apartments in many cities put an end to the price increases that had been going on for years. The trend reversal on the real estate market has now been fully completed in the third quarter.”

According to UBS, Munich has the highest price-to-rent ratio. It is therefore particularly expensive to buy a property here compared to renting. After prices had more than doubled in the past decade, growth here too has weakened to around five percent. “The recovery is coming to an end,” Kunkel said, looking at both cities.

Frankfurt: “Significant price corrections” expected in property prices

In general, UBS sees property markets ahead of a turning point. While interest rates have risen rapidly and the economic outlook is clouded, high inflation is reducing household purchasing power. This means that the still robust labor market in many cities is the last pillar of the domestic market. However: The “immowelt price compass” also analyzed how the loan amounts that buyers can afford have changed if they do not want to exceed the recommended housing expenditure percentage of 30 percent. The result: The budget has been significantly reduced in all 14 surveyed cities in Germany. The losses are strongest in Stuttgart. A family must reduce their budget by 109,000 euros in order not to exceed the 30 percent limit. Instead of a loan of 431,000 euros, only 322,000 euros is now possible with a healthy load due to the increased interest rates.

Contrary to many experts, who only expect the property boom to slow down, UBS warns of serious consequences: in many of the very highly rated cities, “significant price corrections are to be expected” in the coming quarters. (fd/dpa)

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