Price effects in the residential property market due to the Covid-19 pandemic

Generally, property prices correspond to discounted rental income. Therefore, to determine the price, assumptions are required on future rents, risk premiums and interest rates. If expectations were already too optimistic (speculative bubble), prices should collapse in light of the pending economic shock. However, as shown by indicators on construction activity, borrowing and imputed housing costs, such speculative exaggeration cannot be seen on the German housing market. Nevertheless, the upcoming economic crisis will affect all three influencing factors. Still, a relevant reduction of the rent level seems unlikely, as experience from the past economic crisis has shown. Based on possible bankruptcies and increased unemployment, future rent expectations are likely to be reduced because households will overall have less income. This should have a negative impact on prices. Uncertainty is also growing, which will increase the risk premium and will be a burden on the purchase price. As benchmark for the current economic shock, the impacts on economic output during the financial crisis is chosen. However, long-term interest rates may drop even further. After all, the ECB significantly increases its bond purchases, and past pandemics have contributed to an increase in the accumulation of savings. In combination of these effects, slight price reductions or even a sideways movement can be expected for Germanys residential property market.