Experts: Falling real estate prices, hard times for tenants

Living - Experts: Falling real estate prices, hard times for tenants

In view of the housing shortage and high immigration, experts expect rents in Germany to continue to rise noticeably in 2024. Property prices, on the other hand, are likely to continue to fall somewhat - price pressure is particularly high for properties with a poor energy balance, partly due to uncertainty surrounding the Heating Act. However, the price correction on the real estate market could end when key interest rates fall in the new year.

"We expect political uncertainty to remain high in 2024 and see little scope for stimulus in new residential construction," said Roman Heidrich, expert for residential real estate valuations at major broker Jones Lang LaSalle (JLL). The excess demand on the rental market in particular will intensify.

More tenants than owners

In the third quarter, rents in the eight largest metropolitan areas in Germany climbed by 8.4 percent year-on-year, according to new data from JLL for Deutsche Presse-Agentur. The second quarter saw an increase of 3.8 percent. Rents also rose sharply year-on-year in other major cities - for example in Mannheim (5.7 percent), Bonn (4.8 percent), Essen (5.2 percent) and Wuppertal (5.7 percent).

The increases were higher than in other urban areas and in rural areas, where rents rose by a good four percent year-on-year and less than two percent compared to the previous quarter. "We assume that rents will continue to rise in the medium and long term, as demand in most regions of Germany will continue to significantly exceed the shrinking supply of new apartments in the coming years," said Heidrich.

Due to the rise in interest rates and high construction costs, many people are switching to rental apartments - the fall in purchase prices is not compensating for more expensive loan installments. Germany is already the only EU country with more tenants than owners, with the ownership rate standing at 47% in 2022 according to the statistics authority Eurostat. The record-high immigration in 2022 has further increased the demand for housing.

Financiers: real estate crisis not over

While rental apartments are in contention, property buyers can still hope for discounts in 2024. The significant rise in interest rates may not yet be fully reflected in the prices for private residential property, said JLL expert Heidrich. And from the perspective of the Association of German Pfandbrief Banks, the peak of the real estate crisis is not expected until next year. The association, which represents the most important real estate financiers, believes that further price declines can be expected in the coming quarters.

Property prices have been falling since mid-2022, the peak of the real estate boom. According to the Federal Statistical Office, the third quarter of 2023 saw a year-on-year decline of a good ten percent. However, prices had also roughly doubled during the boom since 2010. And according to the Bundesbank, the level was far too high: residential properties were overvalued by an average of 20 to 30 percent in 2022.

Houses with high energy consumption are now under particular pressure. For residential properties with the worst energy efficiency class H, an average of 14% less had to be paid this year than in 2022, writes the direct bank ING. For properties with the best energy efficiency class A+, the price drop was only 1 percent. "Whereas location used to be the decisive criterion for the asking price, today a good energy label is the ace up your sleeve."

JLL is also observing a large price gap. In the third quarter, houses in the two lowest efficiency classes G and H were 28.7 percent cheaper than buildings in the best classes A and A+. "Owners of properties with poor energy efficiency will face increasing difficulties in the future when renting, selling and financing their properties," said JLL expert Heidrich.

Will falling interest rates put an end to falling prices?

However, one important factor could change in the new year: Interest rates. If the sharp rise in interest rates as a result of the war in Ukraine and inflation has stalled the long property boom, a turnaround in interest rates could stabilize the market. Even if the European Central Bank (ECB) is keeping a low profile: With inflation falling, economists expect the ECB to cut key interest rates in the first half of 2024.

According to Landesbank Helaba, residential property prices are likely to stabilize in 2024. "The affordability of residential property will improve somewhat due to falling house prices, rising real wages and lower financing interest rates."

DZ Bank expects the correction on the real estate market to slow down in 2024 and end as interest rates fall. However, prices are still likely to fall by 0.5 to 2.5 percent on average over the year. The peak in financing costs has probably been passed.

Building interest rates have already fallen sharply in anticipation of a looser monetary policy. According to FMH-Finanzberatung, around 3.5 percent per year was due for ten-year loans shortly before Christmas - at the end of October it was 4.25 percent. "Banks are pricing in possible interest rate cuts by the central banks in the coming year," says Ingo Foitzik, Managing Director of Construction Financing at the comparison portal Check24.

Thanks to the recent fall in lending rates, buyers are saving five-figure sums, estimates Tomas Peeters, head of Baufi24 Baufinanzierung AG. "The outlook for property purchases has brightened considerably for 2024."