House prices fall sharply - but buying remains expensive

Real estate - House prices fall sharply - but buying remains expensive

It sounds like a Christmas present for anyone planning to buy a property in 2024: According to the Federal Statistical Office, the fall in prices for apartments and houses accelerated once again in the third quarter of 2023. Residential properties became 10.2 percent cheaper on average compared to the same period last year. This is the sharpest decline since the time series began in 2000. In the second quarter, the statisticians had recorded a decline of 9.6%, while at the beginning of the year, prices were 6.8% lower than in the same period of the previous year.

Compared to the second quarter of 2023, residential properties became 1.4% cheaper. Prices have been falling continuously since their peak in the second quarter of 2022. This trend on the real estate market is primarily due to the sharp rise in interest rates. They have made loans much more expensive. Many people can no longer or no longer want to afford their own four walls. The banks' new business with real estate loans has therefore slumped noticeably.

Prices: sideways or steeply downwards?

Prices fell in both cities and rural regions. In the major cities of Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf, detached and semi-detached houses became 12.7 percent cheaper, while buyers had to pay an average of 9.1 percent less for apartments than a year earlier. In sparsely populated districts, prices for detached and semi-detached houses fell by 12.4 percent, while condominiums were 5.6 percent cheaper year-on-year.

However, experts have different views on the latest figures: Ronald Slabke, CEO of Hypoport, a technology company for the real estate industry, finds the report too alarmist. He writes on the short message service X that the market is currently moving sideways and that the big price drop already happened last winter. "But the drama has been out of the price trend for a whole year now. Actually. The fact that (sic!) tomorrow thousands of people looking for an apartment will once again deceptively hope that home ownership will become much cheaper is collateral damage accepted by the authorities," says Slabke.

Condominium costs as much as 27 years' rent

Konstantin Kholodilin, real estate expert at the German Institute for Economic Research (DIW), on the other hand, confirms the trend that can be seen from the Destatis figures. "After reunification, there was a brief property price boom," the researcher told Capital. "After that, between 1995 and 2010, property prices in Germany stagnated; according to OECD data, they only fell by 1.3 percent between 2001 and 2010."

According to Kholodilin, 2010 was followed by what was probably the longest and strongest property price boom since 1970: prices rose by around 90 percent between 2010 and 2022 - almost doubling. A significant part of this was speculative exaggeration. "Now we have a price correction: between the second quarter of 2022 and the third quarter of 2023, property prices fell by 9.9%. As the speculative component has not yet been fully exhausted and interest rates remain high," the expert expects prices to continue to fall, but not for too long. The basic interpretation of the statistical figures is correct: This is indeed the sharpest decline - and not just since 2000, but since 1995. The bubble has burst, he says.

According to a study by DZ Bank, the downward trend is also likely to continue in 2024 despite the expected turnaround in interest rates. "We expect an annual average decline of half a percent to two and a half percent," said analyst Thorsten Lange. Due to falling inflation, many economists assume that the European Central Bank will initiate a turnaround in monetary policy next year and lower its interest rates. This should also make mortgage loans cheaper again.

Buying is only worthwhile for owner-occupation

However, buying a house will not be easy for many people despite falling prices, precisely because the level remains high in many places. And not only have prices almost doubled according to DIW calculations, rents have also risen, albeit less sharply: they increased by a total of 53 percent between 2010 and 2022. Currently, a condominium in large cities costs as much as 27 annual rents, compared to 28 annual rents last year.

In a recent interview with Capital, real estate expert Michael Voigtländer from the Institute of the German Economy (IW) said that it is still only worthwhile for people on average incomes to buy in the city if they use the property themselves. "If I have a time horizon of 15 years, then I can already assume that the increases in value will be very strong." In the fall, he predicted that house prices will soon even rise again because rents will continue to become more expensive and interest rates will tend to fall.