Shares are sometimes a good early indicator when it comes to real economic development. Share prices collapsed both before the financial crisis from 2007 and before the coronavirus crisis, thus anticipating a significant downturn in national income.

However, this indicator is not one hundred percent reliable. The US Nobel laureate in economics Paul Samuelson once said: "The stock market has successfully predicted nine of the last five recessions." This means that not every downturn on the capital market is followed by an economic downturn.

Let's take a look at a current example. Prices of residential real estate shares have fallen by an average of around 20 percent since the start of the war in Ukraine. After all, inflation is rising, which in turn leads to higher interest rates, which, according to economic theory, depresses demand for real estate. So is the stock market oracle predicting a slump on the real estate market?

To put it bluntly: most probably not. This is because the massive slump in recent months can only be partially explained by inflation and rising interest rates. Another factor is the standard reaction of investors to react to interest rate rises by selling shares. Another decisive factor for real estate companies is the minimum standards for energy efficiency, for example due to a planned EU directive. The necessary renovations are likely to be very expensive and very time-consuming due to a shortage of tradesmen and skyrocketing prices for building materials.

But what the sellers of real estate shares overlook: Owners of large portfolios in particular - such as Vonovia - will be able to shoulder these additional costs much better than small landlords. Their apartments, unrenovated and burdened with high ancillary costs, will then become practically unlettable, which will drive up the rental income of large landlords.

In addition, there are long-term factors such as presumably rising salaries due to demographic change (effects that I have already explained here). Higher salaries can lead to higher rents, which in turn leads to higher profits for real estate companies.

Particularly in view of the fact that, according to our forecasts, interest rates will remain below the inflation rate in the future, residential real estate continues to promise good earnings potential even after the recent rise in interest rates; the slump in real estate share prices in Germany is - this time - not a reliable early indicator of falling house prices in the future.

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