German house prices on the rise

The war in the Persian Gulf is slowing down the German real estate market, ...

The war between the US and Israel on one side and Iran on the other has weighed on the German residential real estate market in recent weeks. For one thing, risk premiums on loans have risen worldwide, and in tandem interest rates on real estate loans in Germany, which has increased the financing costs associated with purchasing a property. In addition, higher energy prices have reduced real disposable income, which also makes it more difficult to finance a property.

... but likely only temporarily, ...

However, these headwinds are likely to prove only temporary. We expect the inflation rate to remain near 3% for some time, despite a decline in oil prices, as companies increasingly pass on a portion of their higher costs to customers—a trend that will eventually reach households as well, albeit with some delay. Next year, however, the inflation rate is expected to fall again worldwide. Against this backdrop, the Fed and the ECB are likely to lower their interest rates again starting in the middle of next year. As markets increasingly anticipate this amid a declining oil price, longer-term yields—which also strongly influence movements in mortgage rates—are likely to decline moderately again as early as the second half of this year.

... which suggests that home prices will continue to rise, ...

In addition, people's purchasing power is expected to recover as inflation falls again and incomes continue to rise steadily. This should lead to a slight improvement in the affordability of residential real estate, which suffered from higher interest rates in the first half of this year. This suggests that—following a period of weakness in the first half of the year—home prices will resume their upward trend later in the year and, as in the past two years, will rise at an average annual rate of about 2 to 2½%.

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