For years, real estate prices in Germany and around the world have only known one direction: upwards.

But that's over now: "The boom is over," says Maximilian Kunkel, chief investment strategist at the major Swiss bank UBS in Germany, in an interview with the FAZ. With this statement, Kunkel refers to the real estate market in general and to the cities of Frankfurt and Munich in particular .

These two metropolises have once again featured prominently in UBS's annual ranking of the risk of real estate bubbles in major international cities, which the bank published on Wednesday.

John Knight

Correspondent for politics and economy in Switzerland.

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Frankfurt is in second place in this ranking, behind Toronto in Canada, after the German city took the inglorious top spot last year.

Munich remains in fourth place.

Kunkel expects prices for condominiums in these cities to fall in the coming year.

But he doesn't expect an abrupt slump of 50 percent or anything like that: "The air is gradually coming out of the bubble."

downward trend was indicated

The downward trend has already been indicated in the past few months.

For the first time in a long time, the usual double-digit price increases in Frankfurt have not materialized.

According to the study, between mid-2021 and mid-2022 real estate prices there rose nominally by only around 5 percent.

Adjusted for inflation, housing prices have even fallen recently, adds Kunkel.

This should give pause to investors looking to buy property to protect against inflation.

This only works as long as rents rise at about the same rate as inflation and as long as valuations are not excessively high.

But now rents are no longer keeping pace with inflation.

"Real estate is no longer the panacea against inflation," warns Kunkel.

Investors who are considering buying in Frankfurt or Munich for yield reasons should therefore exercise caution at the moment.

A family that is not looking for an apartment for an investment, but for their own needs, of course, does not have to worry about that.

Unhealthy imbalance in the market

Kunkel points to an unhealthy imbalance: "Adjusted for inflation, prices for condominiums in Frankfurt have risen by 110 percent since 2010, while rents have risen by 28 percent and incomes by 10 percent." This means that a qualified employee from the service sector now has to raise eight annual incomes to buy a 60 square meter apartment.

And an investor would have to rent out his apartment for 41 years in order to recoup the purchase price for the property.

Rising interest rates, which increase financing costs, are also likely to slow down demand for home ownership.

However, the scarce supply of living space is having a stabilizing effect on the market and prices, says Kunkel, referring to the historically low vacancy rate in Frankfurt of less than 1 percent.

The trend towards smaller household sizes is exacerbating the housing shortage.

The labor market, which remains stable, is also contributing to the fact that house prices have not yet fallen more sharply.

However, if unemployment and the fear of losing a job rose sharply, the whole thing could start to shake.

In such a case, Kunkel believes it is possible that prices could nominally fall by more than 20 percent.

In what period of time this could happen

Also in Munich overheating

According to UBS, the housing market in Munich has also overheated.

Buying a property there is slightly more expensive than renting it in Frankfurt.

After real estate prices on the Isar more than doubled in the past decade, the nominal price increase there has recently cooled to around 5 percent.

The Munich housing market is characterized by a low vacancy rate and a growing number of people in work.

The increased mortgage interest rates made it even more difficult for residents to get hold of an affordable apartment: Compared to the time before the pandemic, a highly qualified worker from the service sector in Munich can now only afford an apartment with one room less on average.

Of the nine major cities with a particularly high risk of a bubble in the real estate market, four are from Europe.

In addition to Frankfurt and Munich, Zurich and Amsterdam are in third and seventh place.