There is a gap between the prices for new buildings and existing properties. picture alliance / imageBROKER | Lilly
According to a study by DZ Bank, prices for residential property in Germany are stabilizing.
The stabilization is due, among other things, to the ongoing need for living space and the increased construction costs.
Experts expect residential property prices to fall by up to 2.5 percent in 2024. Slight price increases will not be possible again until 2025.
The real estate market in Germany has been put to a tough test in recent months. 2023 was a black year for the industry. After the sharp rise in interest rates, valuations of residential and commercial real estate fell noticeably. After all, prices for residential real estate currently appear to be stabilizing again.
The reasons for this are the ongoing high demand for living space and the sharp increase in construction costs. This is what an investigation by DZ Bank based on the Europace price index result. The central bank for all Volksbanks has taken a closer look at developments on the local real estate market.
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Accordingly, the correction in residential real estate is still moderate despite high valuations and quadrupled mortgage interest rates. Last year, residential real estate prices fell by five percent. In a direct comparison to mid-2022, the price fell by a maximum of around eight percent.
Now the twist: there is no sign of a further decline at the beginning of this year. The situation is similar with rented apartment buildings. For example, the large real estate group Vonovia, which rents out almost half a million apartments, did not have to make any further reductions in its inventory in the first quarter.
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The valuation for one square meter of living space remained constant at 2,300 euros compared to the end of the year. For comparison: Last year a value correction of twelve percent was necessary. The price index of the Association of German Pfandbrief Banks also documents the stabilization of prices for residential properties. This has only documented a minimal minus of 0.2 percent in the past few months.
In addition to this development, high inflation must also be taken into account. All consumer prices rose by around seven percent from mid-2022 to mid-2023. This means that the real correction in real estate prices is almost twice as high as the nominal one. Despite the sharp correction, the price level remains relatively high.
There is a gap in these properties Prices differ
DZ Bank makes it clear that the market environment for residential real estate has not only changed due to the much higher financing costs. The sharp increase in construction costs, which have made new buildings more expensive by over a third within three years, are also an important factor. The reasons for this are higher building material prices and increased energy efficiency levels.
As a result, the supply of new buildings is shrinking because newly built houses with higher interest rates can hardly be paid for. In contrast, the price discounts for existing houses have increased as a result of the heating law passed in 2023. This also ended the largely synchronized price development of new and existing properties. While new houses have become moderately more expensive since mid-2022, the prices for existing houses fell by more than ten percent. The worse the energy efficiency, the greater the price discount.
In 2024 the market environment will have calmed down
Construction costs and real estate prices no longer rose as much in 2024. The interest rate landscape has also stabilized after the sharp increase. Mortgage interest rates fell slightly again, while they had risen to more than four percent in 2023. Since the turn of the year they have been fairly constant at 3.5 to 3.7 percent for real estate loans with a ten-year fixed interest rate. In the now more stable market environment, the question arises as to whether buying an apartment or house will become more interesting again for those looking for accommodation – or whether renting is the better option.
The majority of apartments and houses sold are existing properties. Due to the opposite price development, the price gap to new buildings has increased. According to the Europace house price index, a new house cost an average of 563,000 euros in March 2024. An existing house, on average 43 years old, is more than 200,000 euros or 36 percent cheaper. In contrast, the gap in March 2022 was significantly smaller at around 22 percent.
Real estate is becoming cheaper again
But real estate is gradually becoming cheaper again. Two years ago, so-called affordability had deteriorated significantly due to the sharp rise in interest rates. Now there is improvement in sight: the combination of falling house prices and rising nominal incomes has improved affordability in the industry again.
In addition, the higher interest rate allows the repayment of loans with the same rate to be reduced somewhat without extending the term. This means that the interest rate increase is not fully effective. With interest rates currently at 3.7 percent instead of just over one percent, the initial repayment can be reduced from three to two percent – with a constant repayment period of almost 30 years. The credit burden therefore increases from 4 percent not to 6.7, but to 5.7 percent. This is much more than when interest rates were low, but the fall in prices also reduces the amount of interest on the loan.
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In the housing market, however, the forces affecting price developments are in opposite directions. The higher financing costs tend to indicate falling prices. In contrast, the high costs of new construction, the decline in new construction and rising rents are indicators of rising purchase prices. This environment is likely to keep prices largely in suspense for the time being.
New construction supply increases tension on the market
Meanwhile, the construction industry is facing considerable challenges: high construction costs and rents make the construction of new rental apartments hardly profitable. In addition, rising interest rates and renovation costs are exacerbating the situation for housing companies, while insolvencies among property developers are increasing. Although planned simplifications in new construction are positive, they will only have a slow effect and will not bring any immediate improvement, writes DZ Bank.
The construction crisis is also reflected in a lack of orders and declining building permits. Without improvement, jobs could be lost and skilled workers could prefer other sectors, making housing construction even more difficult. In Germany, the labor shortage increases the need for high levels of immigration. The sharp rise in rents indicates an acute housing shortage. Nevertheless, no significant inflows of funds are expected from investors, as the capital market offers more attractive alternatives and many have already invested in real estate.
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The real estate market should gradually pick up speed again in 2024
In summary, property affordability appears to be gradually improving again. Despite higher interest rates, the purchase of existing properties is becoming more realistic again, which could stimulate the real estate market. The tight rental market with possible annual rent increases of more than five percent could encourage buying interest – although new buildings remain less affordable due to high interest rates and construction costs. This is what DZ Bank writes.
The experts suspect that the market revival that appears to be imminent will probably not lead to strong price increases. Moderate price increases are more likely in the short term after the market stabilizes. In 2024, residential property prices are expected to fall by up to 2.5 percent, according to DZ Bank. Slight price increases will not be possible again until 2025.