Prices for residential property in Germany fell at a record pace last year. They fell by an average of 8.4 percent compared to 2022, as the Federal Statistical Office announced. These numbers show a break in the trend.
This is the sharpest decline since the time series began in 2000 and also the first since 2007. “From 2008 to 2022, residential property prices rose continuously on average over the year,” it says.
The news coincides with the results of the Postbank real estate atlas, which was published earlier this week. Accordingly, in 2023 the prices for residential property in Germany will have fallen significantly in the majority of districts and independent cities. In around 96 percent of all regions, existing condominiums are actually cheaper than in the previous year.
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21 percent below peak
The development ostensibly follows a clear logic. Inflation data in the euro area has increased significantly since 2021, which the European Central Bank initially dismissed as a temporary phenomenon.
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Advertorial property valuation
After this assessment proved to be a misjudgment, the monetary authorities reacted even more drastically and raised the key interest rate to 4.5 percent between July 2022 and September 2023. This also made financing real estate more expensive.
Prospective buyers received a significantly lower loan amount for the monthly installment that they could afford for interest and repayment. As a result, they could afford less property. This put a lot of pressure on prices on the market. However, inflation also caused a decline in purchasing power, which made potential buyers question whether they could still afford home ownership.
Chaos in the funding programs
But beyond these two causes, other reasons for the price decline remain underexposed in the analysis of prices, both in the reception of the Destatis figures and in the Postbank analysis. They mainly have to do with interventions in the market.
2023 was the year in which the real estate market was primarily shaped by two political projects at a national and international level. The regulations adopted resulted in a devaluation of the existing building stock, and prospective buyers derived a need for renovation from the requirements.
On the one hand, the debate about the amendment to the Building Energy Act (GEG) began around March, which requires owners to rely on a solution that is at least 65 percent compatible since the beginning of this year, subject to municipal heat planning, when replacing the heating system to be operated using renewable energies.
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This usually boils down to a heat pump, which is the optimal solution in new buildings, but often cannot be operated efficiently in existing buildings without more or less complex upgrades. The inadequate preparation by the Green State Secretary in the Federal Ministry of Economics, Patrick Graichen, who has since been fired, as well as the completely unsuccessful communication surrounding the “Heating Act” and the chaos in the corresponding funding programs, which continues to this day, caused lasting uncertainty in the market.
At the same time, the EU Commission, led by Green Cirián Cuffe, pushed forward the so-called Buildings Directive, which would require member states to renovate their existing buildings to minimum energy standards within a few years.
The already relatively high quality of its building stock was Germany’s downfall: the originally specified savings in CO₂ emissions were based on the status quo. The directive has now been adopted in a slightly different form.
There is a lack of planning security
“This aspect is actually significantly neglected in the analysis of the price decline last year,” says Thomas Beyerle, chief analyst at the international real estate service provider Catella, to WELT. “The debates about the heating law and the building directive have caused a lot of uncertainty in the market. This also means that interested parties have postponed their purchase wish for the time being.”
Anyone who doesn’t know what politicians will come up with next and how expensive it will be should, if in doubt, stay away from a life project like buying real estate – or lower their bid significantly.
“It’s a similar psychology to a stock about which there was unexpected news and where no one knows whether that’s all there is to it,” says Beyerle. “No one touches it with a pair of pliers.” To repair this damage and restoring lost trust among market stakeholders will not be easy. “The industry now needs five years of calm and pragmatic decisions so that everyone involved can have planning security again.”
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Michael Voigtländer, Head of International Economic Policy, Financial and Real Estate Markets at IW Cologne, also sees political interventions as one of the reasons for the falling prices. “Buyers have to factor in higher renovation costs and uncertainties in regulation, which is why the discount for older properties has increased overall,” he told WELT.
Tobias Just, holder of the chair for real estate economics at the IREBS International Real Estate Business School at the University of Regensburg, differentiates between the causes and adds: “Commercial real estate is hit much harder by the economic weakness than residential real estate. In the latter case, the increased uncertainty is an important reason for the reluctance to buy.”
Eckhard Wurzel, who teaches European economics at the University of Konstanz and the University of Göttingen, also believes that looking at increased interest rates in isolation falls short. “Regulatory conditions also influence how quickly the real estate sector recovers and prices stabilize. A good example is the implementation of climate policy goals, such as those contained in the EU Buildings Directive in particular.”
Longer soil formation phase
What’s next with the prices? They are likely to fall somewhat from their high level in 2024, despite the interest rate cuts expected by the ECB on the market, which will also make real estate financing cheaper again and properties more affordable.
Real estate prices are expected to fall by an average of 1.7 percent, according to a survey of 14 real estate analysts by the Reuters news agency. An increase of 3.0 percent is only expected for 2025. “In general, we expect a longer phase of bottom formation,” said ING chief economist Carsten Brzeski.
The fact that prices have reached a bottom and are likely to rise again is also due to further developments in the housing market. An end to the construction crisis, which was caused by a mix of inflation, a shortage of skilled workers, political over-regulation and the resulting high costs, is not yet in sight.
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The decline in construction activity is primarily reflected in the government’s missed new construction targets. The traffic light actually wanted to build 400,000 apartments per year. In 2023, only 260,000 were approved.
The construction crisis will further reduce supply and meet with a constantly increasing demand for living space, especially due to immigration predominantly into the sought-after metropolitan areas, which the government is obviously unwilling to control, manage or even limit. The combination of these two developments – increasing demand, decreasing supply – will at some point affect prices.