Economy, Finance and Markets

Not only interest rates, but above all political decisions determine the risks on the real estate market

Not only interest rates, but above all political decisions determine the risks on the real estate market Prof. Dr. Andreas R. Dombret

Is there a risk of a crisis on the real estate markets? To avoid risks, real estate policy should aim to match supply to demand and counteract market distortions. This op-ed was originally published at the Neue Zürcher Zeitung here.

by Andreas Dombret and Oliver Wünsch

The real estate market is undoubtedly one of the most important markets in any modern economy. 40% of all loans in the European banking sector are mortgages. Real estate serves as collateral for a large number of financial instruments, both directly and indirectly, and it plays a significant role in the investments of insurers and pension funds.

However, real estate is much more than just a financial asset. Houses and apartments fulfill the essential basic need of providing a “roof over one’s head.” For many, owning real estate is the most crucial element of wealth accumulation, but it is also a primary motive for indebtedness. Commercial properties are indispensable factors of production for users of offices and production facilities, even though their significance has decreased with the trend towards more home office after the pandemic. Any instability in the real estate segment not only affects the financial industry but the entire economy, including social stability.


The prolonged period of low interest rates over many years has led to significant dynamics in the real estate market. Since 2010, valuations in Germany and Switzerland have increased by over 60%. Studies suggest that a significant portion of the global wealth accumulation during this period can be attributed to real estate appreciation. The interest rate shift initiated since the middle of last year has now left clear marks on valuations. Real estate market growth in Switzerland has stagnated, and in Germany, it has nearly come to a standstill, while property values in Sweden have even declined by 20%. In the commercial real estate sector, the first spectacular insolvencies have occurred with Signa.


Given the increased interest rates, is there now a risk of a significant correction or even a crisis in the real estate markets? This depends primarily on the overall economic development. Although central bank interest rates have been raised significantly in the last nine months due to high inflation, the peak seems to have been reached, which is already beneficial for the borrowing costs. The probability of a “soft landing” for our economies has increased recently. Fixed-rate mortgages, popular in private residential areas in Germany and Switzerland, also cushion the short-term impacts. Banks have tightened their credit criteria in the recent past, partly due to regulatory pressure. However, as long as borrowers can meet their payments, there is no expectation of crisis-accelerating selling pressure. This, in turn, depends significantly on economic growth and, above all, unemployment. While economic growth in Europe is struggling, unemployment remains at a low level; a significant increase is not expected in either case.

The real estate market is and remains highly segmented. Commercial properties operate differently than residential properties, and the mantra “location, location, location” almost always applies. Particularly in economic centers with stable high demand, broad valuation corrections for existing properties are rather unlikely. However, the future looks less optimistic. Currently, ten-year German government bonds yield 2.1%, but real growth is below that. Achieving a positive real return with new real estate investments is challenging due to scarce, expensive land, and high construction costs. Therefore, investors will have to remain cautious in the future, as they can hardly generate the expected returns from their capital providers. This does not bode well for meeting the demand for new housing.

The most effective method to avoid imbalances and risks is a real estate policy that brings supply and demand into a certain balance and counteracts market distortions. This is currently only partially the case. Land availability is not rationed by financial markets but by political decisions. Construction costs have risen significantly and sustainably due to issues in supply chains and ever-increasing legal requirements. People want to live near economic centers, not least for sustainability reasons. Everyone needs a roof over their head, and the per-person land consumption is hard to restrict without being perceived as a loss of prosperity. Housing costs absorb increasingly larger portions of household income, while property ownership becomes less affordable for fewer people. The funds then lack for growth-boosting consumption, especially for wealth accumulation.

While financial market regulators and central banks can take politically controversial measures against price bubbles, the structural causes of imbalances in the real estate market and their effects on the economy and financial stability do not fall under their jurisdiction. Although the increased interest rates significantly influence the real estate market in the short and medium term, it is primarily the responsibility of policymakers to create conditions that adequately meet the needs of buyers and sellers, tenants, and landlords. This way, the financial risks in the real estate sector can also remain manageable.

Andreas Dombret is Global Senior Adviser for Oliver Wyman and was a member of the Executive Board of Deutsche Bundesbank; Oliver Wünsch heads the Financial Services Practice at Oliver Wyman Switzerland.

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