Houses and apartments fell in price at a historic rate last year. However, the decline has moderated. Has the real estate crisis reached its lowest point?
Sudden end to a long boom: Prices for houses and apartments in Germany fell more sharply in 2023 than at any time since the turn of the millennium. Residential properties fell on average by 8.4 percent compared to the previous year, according to the Federal Statistical Office.
“This was the largest year-on-year decline since the time series began in 2000 and the first decline since 2007.” Before that, residential real estate had steadily increased in price between 2008 and 2022. Banks expect the recent price decline as interest rates fall to end this year.
The decline continued at the end of 2023, albeit at a weaker rate: in the fourth quarter, according to the Wiesbaden statisticians, prices fell by 7.1 percent compared to the same period last year and by 2 percent compared to the previous quarter. In the third and second quarters, prices fell on average by around ten percent year-on-year.
Cities are particularly affected
The main reason for the real estate crisis is the sharp rise in interest rates, which has made loans significantly more expensive. Many people can no longer afford or want to afford their own four walls, and investments are no longer worthwhile for large investors. At the same time, demand for living space remains high, especially in cities, not least because of high levels of immigration, while new construction is in crisis due to the rise in interest rates and expensive materials.
According to statisticians, prices collapsed at the end of the year in both cities and rural areas. In the seven metropolises – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf – prices for single- and two-family homes fell by 9.1 percent in the fourth quarter compared to the same period last year, and condominiums cost 5.8 percent less.
In urban districts, the price decline for one- and two-family homes was particularly large at 11 percent compared to the same quarter of the previous year. Buyers there had to pay an average of seven percent less for condominiums. In sparsely populated rural districts, single- and two-family houses were available at 6.9 percent and condominiums at 2.8 percent.
Correction after unprecedented boom
However, the numbers are average data. The price gap between modern, energy-efficient buildings and properties with high energy consumption is large. While studies show that buildings with old oil or gas heating systems and poor energy ratings have lost a lot of value, properties that are state-of-the-art and use little energy are sold at significantly higher prices.
According to the Kiel Institute for the World Economy (IfW), the German real estate market saw the sharpest price decline in around 60 years in 2023. Never since the appraisal committees began collecting purchase prices have real estate prices fallen “so quickly,” the institute said in February. However, a correction is in order: since 2009, thanks to the low interest rates at the time, real estate prices have risen three to four times, depending on the segment, before the crash began in 2022.
Despite the drop in prices, the demand for living space remains unbroken – also because very little is being built. The Ifo Institute only expects around 225,000 completions in 2024 after around 270,000 last year. The federal government’s former goal of 400,000 new apartments per year is long out of reach.
Will falling interest rates bring about a turning point?
This year, banks are expecting an end to the real estate crisis – as inflation has fallen, the European Central Bank is expected to cut key interest rates in June. In anticipation of the interest rate turnaround, building interest rates have already fallen significantly: According to FMH Finanzberatung, ten-year loans were currently due at just under 3.5 percent per year – at the end of October it was still over four percent. This makes real estate financing cheaper.
Landesbank Helaba, for example, believes that residential property prices will likely stabilize in 2024. DZ Bank also expects that the correction in the real estate market will slow down and that prices will only fall slightly on average over the year. The peak in interest rates has probably been passed.
The commitments from banks for real estate loans to private customers increased slightly again at the beginning of the year. According to data from the Bundesbank, housing loans amounting to almost 14.7 billion euros were granted in January, the highest value since March 2023.
The Association of Pfandbrief Banks, which represents the most important real estate financiers in Germany, recently warned against too much euphoria. “A turnaround in real estate prices, which is often the subject of public speculation, is not yet foreseeable,” said Managing Director Jens Tolckmitt. “2024 will also remain difficult for the time being.”
Source: Stern
