High interest rates, lame new construction
This is how much real estate prices are falling
March 22, 2024, 10:39 a.m
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Upside down world in the German real estate market: The demand for living space is growing, but at the same time less is being built. Looking at the official house price index, economists are talking about the strongest price decline in decades.
Overall, prices for single-family homes and apartments fell more sharply last year than at any time since the turn of the millennium. Residential real estate in Germany fell in price 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.” The fall in prices hardly weakened at the end of the year: according to official data, in the fourth quarter of 2023 prices fell by 7.1 percent compared to the same period last year. In the previous quarter it was minus 10.1 percent.
A look at the details provides information about possible causes of the price development: year-on-year, existing properties fell significantly more expensively by 7.8 percent than new buildings (minus 3.2 percent). Possibly any renovation costs are now becoming more important in the calculations of potential buyers in view of rising energy costs.
However, according to the data, the trend towards falling real estate prices began at the end of 2021 – and thus before the start of the Russian war of aggression in Ukraine and the gas price crisis it triggered. Real estate prices are falling nationwide: Prices fell in both cities and rural areas, the statisticians explained.
In urban regions, the price decline for single- and two-family homes in the fourth quarter was particularly large at eleven percent compared to the same quarter of the previous year. In the seven large metropolises – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf – the prices for single and two-family houses fell by an average of 9.1 percent within a year at the end of the year. Condominiums there cost 5.8 percent less.
The German real estate market is experiencing profound changes. According to estimates by the Kiel Institute for the World Economy (IfW), there was the sharpest price decline in residential real estate in Germany in around 60 years in 2023.
The main reason, it is said, is the sharp rise in interest rates, which has made loans much more expensive. Many people simply could no longer afford their own four walls. Even for financially stronger investors, the residential real estate business is no longer profitable under the current conditions. At the same time, demand for living space remains high, especially in cities, while new construction is in crisis due to rising interest rates and expensive materials.