German real estate prices are falling, and are starting to scare the banks
The crisis in the German real estate market is getting worse and is starting to scare the credit system too. According to data from the Federal Statistical Office, residential property prices in Germany suffered a drastic decline in the third quarter of 2023. From July to September they fell by an average of 10.2% compared to the same period last year. This is the largest year-on-year decline since the time series began in 2000.
The decline in property prices in Germany is therefore accelerating. The main reasons for the decline in input prices continue to be lower affordability due to rising financing costs, the energy transition and persistently high inflation. “While almost all homes sold well during the boom, properties with negative characteristics in particular are now set to decline,” Thorsten Lange, an analyst at DZ Bank, said this week.
Some experts are confident in a price stabilization in 2024 and predict that the price correction will end next year, writes DZ Bank in a recently published study. Average annual declines of between 0.5% and 2.5% are expected. Properties located in low-income or energy-intensive areas are likely to see weaker performance, Lange said.
The head of the Association of German Banks Pfandbrief fears the sector's worst crisis in 15 years. However, there is no risk of a banking earthquake , at least for now, because banks are acting prudently.
German real estate financiers are considering additional safety provisions in view of the difficult situation on the German market. “We have to assume that some banks will increase their risk provisions again in the near future,” Gero Bergmann, president of the Association of German Pfandbrief Banks (VDP), told Handelsblatt. Experience has shown that banks make additional provisions in the fourth quarter, when annual financial statements are due. “It is also possible that there will be an increase next year,” Bergmann added.
According to Bergmann, the sector is going through the worst crisis in the last 15 years. According to the association, the peak is yet to arrive. “Things are going to get a little worse before they get better,” Bergmann said. “According to our association, we will see the bottom around the middle of next year.”
The problems with this policy, however, are twofold: on the one hand, the increased provisions reduce the banks' corporate profits, and this will greatly displease shareholders and cause its value on the stock market to fall. This event will be particularly serious if the banks were to recapitalize, because they will not find adequate funds at affordable prices. Furthermore, the fact that prices recover in 2024 is a hope that is in contrast with the gloomy economic forecasts.
For now, German banks appear protected from the real estate crisis, but what would happen if this were to continue or deepen?
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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/i-prezzi-immobiliari-tedeschi-cadono-e-iniziano-a-fare-paura-alle-banche/ on Sat, 23 Dec 2023 11:30:45 +0000.