The rise in interest rates and high inflation have brought the long real estate boom in Germany to an abrupt end. In the final quarter of 2022, apartments and one- and two-family houses fell more cheaply than they had in 16 years, as the Federal Statistical Office announced on Friday in Wiesbaden. Experts expect the price decline to continue this year. Accordingly, the prices for residential real estate fell by an average of 3.6 percent in the fourth quarter compared to the same quarter of the previous year. According to the statisticians, “the main reason for the fall in purchase prices is likely to be lower demand as a result of higher financing costs and persistently high inflation”. Compared to the third quarter of 2022, the price decline at the end of the year was even more significant at minus 5.0 percent.
In the final quarter of 2022, there were mostly price declines in both cities and rural regions. Single and two-family houses became cheaper than condominiums. The prices for one- and two-family houses in large urban districts fell by around 5.9 percent compared to the same quarter of the previous year, while the prices for condominiums fell by 1.0 percent. Overall, residential real estate rose by 5.3 percent in 2022. In 2021, however, the plus was more than twice as large at 11.5.
Monthly installments for interest and principal are hundreds of euros higher
The reason for the end of the boom is the increase in key interest rates by the major central banks in the fight against high inflation. As a result, the construction interest on loans with a ten-year fixed interest rate has quadrupled within a year from just under one percent to almost four percent. As a result, the monthly installments for interest and repayment are hundreds of euros higher than before. Buying real estate is therefore no longer affordable for many people.
In any case, because of inflation, money is tight for many people, and banks are examining financing more critically. Agents are reporting far fewer property inquiries than they used to. According to experts, the trend of falling real estate prices is likely to continue. The German Institute for Economic Research considers a decline of up to ten percent possible in 2023, and DZ Bank expects discounts of four to six percent.
Real estate market was overheated
It is undisputed that the real estate market was recently overheated. At the end of 2022, real estate prices in the cities were 20 to 45 percent above the justified level, as the Bundesbank calculated.
However, experts doubt that Germany is about to burst a real estate bubble. The housing market is considered to be robust even in economic crises, because real estate is often financed conservatively and on a long-term basis. Jens Tolckmitt, Managing Director of the Association of German Pfandbrief Banks (vdp), recently said that even if prices fell by a total of 15 percent over a longer period of time, the market would be at the level it was at the beginning of 2020. However, interest rates on construction loans and thus the costs for buyers are far above 2020 levels.
At the same time, immigration to Germany was at a record level, also in the wake of the Ukraine war. The need for apartments should therefore continue to increase, explained Michael Voigtländer, real estate expert at the German Economic Institute (IW). “The price declines will remain moderate,” he expects.
Apartments remain scarce
In addition, housing remains scarce because the construction industry is having trouble with low interest rates and expensive materials. In January, incoming orders in the main construction trades continued to collapse, primarily due to weak new construction. That should support real estate prices.
