“The bubble has burst”
Sharpest decline in property prices since 2000
December 22, 2023, 9:47 a.m
Listen to article
This audio version was artificially generated. More info | Send feedback
High inflation and increased financing costs are having an impact on the German real estate market. Residential property prices have fallen more sharply than they have in 23 years. However, the price decline is being slowed by the crisis in housing construction.
Prices for residential property in Germany fell again at a record pace in the third quarter. From July to September they fell by an average of 10.2 percent compared to the same period last year, as the Federal Statistical Office announced. This is the largest decline since the time series began in 2000. The largest declines to date had occurred in the first (minus 6.8 percent) and second quarters of 2023 (minus 9.6 percent).
The main reason for this is likely to be lower demand as a result of increased financing costs and high inflation. From the second to the third quarter alone, prices fell by 1.4 percent. Since the peak in spring 2022, things have been steadily declining. Significant price declines were recorded in both cities and rural regions in the summer. In the top 7 metropolises (Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf) the prices for single and two-family houses fell by 12.7 percent compared to the same quarter of the previous year.
9.1 percent less had to be paid for condominiums. In the sparsely populated rural districts, single- and two-family houses were 12.4 percent cheaper, and apartments were 5.6 percent cheaper. “Until 2022, there was a speculative price bubble in Germany, one of the largest in the last 50 years,” said Konstantin Kholodilin from the Macroeconomics Department of the German Institute for Economic Research. “Prices have been falling since then. The bubble has burst.”
Demand for living space 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. Because of falling inflation, many economists expect that the European Central Bank will initiate a monetary policy change next year and lower its interest rates. This means that mortgage loans are likely to become cheaper again. The key interest rate is currently 4.5 percent.
At the same time, demand for living space remains high, not least because of high levels 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 the whole of 2023 – significantly fewer than in the previous year (a good 295,000). The Ifo Institute is observing a wave of cancellations in construction projects.
DZ Bank: Housing crisis slows price decline
According to the Central Association of the German Construction Industry, there were 22 percent fewer residential construction orders from January to October than in the previous year. The value of orders in the construction industry as a whole fell by 6.3 percent after adjusting for prices compared to the previous month, as the statisticians reported. Federal Construction Minister Klara Geywitz is nevertheless optimistic. The SPD politician expects that around 270,000 apartments will be completed this year and around 265,000 in 2024. The housing market will probably brighten “at the end of 2024 and beginning of 2025,” she told the “Rheinische Post”. However, the numbers are far away from 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 uncertainty again about funding for new buildings due to the budget crisis: The Federal Ministry of Construction recently announced that the funding pot for the program for climate-friendly new buildings was empty. New applications could only be submitted again as soon as the 2024 federal budget comes into force. According to DZ Bank, the construction crisis is slowing the price decline as living space continues to be scarce.