Sharpest fall in real estate prices since 2000

High inflation and increased financing costs are having an impact on the German real estate market. Prices for residential real estate have fallen more sharply than at any time in the last 23 years. However, the fall in prices is being held back by the crisis in residential construction.

Prices for residential real estate in Germany fell again at a record pace in the third quarter. They fell by an average of 10.2 percent from July to September compared to the same period last year, according to the Federal Statistical Office. This is the sharpest decline since the time series began in 2000. The sharpest declines to date had been in the first (minus 6.8%) and second quarters of 2023 (minus 9.6%).

This is likely to be due to lower demand as a result of higher financing costs and high inflation. Prices fell by 1.4% from the second to the third quarter alone. Since peaking in the spring of 2022, prices have been falling continuously. There were significant price declines in both cities and rural regions in the summer. In the top 7 metropolitan areas (Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf), prices for detached and semi-detached houses fell by 12.7% compared to the same quarter of the previous year.

Prices for condominiums were 9.1 percent lower. In the sparsely populated rural districts, detached and semi-detached houses were 12.4 percent cheaper and apartments 5.6 percent cheaper. "Until 2022, there was a speculative price bubble in Germany, one of the biggest in the last 50 years," said Konstantin Kholodilin from the Macroeconomics Department of the German Institute for Economic Research. "Prices have been falling ever since. The bubble has burst."

Demand for housing remains high

According to a study by DZ Bank, the downward trend in prices is 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 expect the European Central Bank to initiate a turnaround in monetary policy next year and lower its interest rates. This should also make mortgage loans cheaper again. The key interest rate currently stands at 4.5 percent.

At the same time, demand for housing remains high, not least due to the high level of immigration, while new construction has fallen into crisis due to the rise in interest rates and expensive materials. Associations in the housing and construction industry expect around 245,000 completions for 2023 as a whole - significantly fewer than in the previous year (over 295,000). The Ifo Institute is observing a wave of cancellations of construction projects.

DZ Bank: Housing construction crisis slows price decline

According to the Central Association of the German Construction Industry, there were 22% fewer residential construction orders from January to October than in the previous year. The value of orders in the main construction sector as a whole fell by 6.3 percent compared to the previous month, adjusted for price, as the statisticians reported. Federal Construction Minister Klara Geywitz is nevertheless optimistic. The SPD politician expects around 270,000 apartments to be completed this year and around 265,000 in 2024. The housing market will probably brighten up "at the end of 2024, beginning of 2025", she told the Rheinische Post newspaper. However, the figures are a long way off the original target of 400,000 new apartments per year.

Experts also see no prospect of improvement. DZ Bank estimates that the number of annual completions could fall to 200,000 apartments by 2025. There is also renewed uncertainty surrounding new construction funding due to the budget crisis: the Federal Ministry of Construction recently announced that the funding pot for the program for climate-friendly new construction is empty. New applications could only be submitted again as soon as the 2024 federal budget came into force. According to DZ Bank, the crisis in the construction sector is slowing down the fall in prices, as living space is still in short supply.