Dusseldorf The historical trend reversal on the real estate market in the past year is now also reflected in the official figures. As reported by the Federal Statistical Office (Destatis) on Friday, the prices for residential real estate in Germany fell in the fourth quarter for the first time since 2010 compared to the same quarter of the previous year.
According to the statisticians, prices fell by 3.6 percent compared to the fourth quarter of 2021, and the purchase prices for apartments and detached and semi-detached houses last fell even more sharply in the first quarter of 2007. At that time, prices fell by 3.8 percent compared to the first quarter of 2006.
The upheaval on the real estate market becomes clearer when looking at the changes compared to the previous quarter. Compared to the third quarter of last year, prices fell by five percent in the fourth quarter of 2022. “The decisive factor for the decline in purchase prices is likely to be a drop in demand as a result of increased financing costs and persistently high inflation,” says Destatis. Compared to the beginning of 2021, building interest rates quadrupled by the autumn of last year and have fluctuated significantly at the new high level since then.
Trend reversal on the real estate market: Real estate prices are falling across Germany
At the end of the year, statisticians mostly observed price declines in both cities and rural areas. While prices fell less in the metropolises, there were clearer reductions in the independent cities.
According to Destatis, in the top 7 cities (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf), prices for single and two-family houses fell by 2.9 percent, and 1.6 percent less had to be paid for apartments.
In the major cities, the prices for single and two-family houses fell by 5.9 percent, while the prices for condominiums in these cities fell by only 1.0 percent. Overall, the prices for single and two-family houses fell more than the prices for condominiums.
Looking at the year as a whole, there is still a plus due to the strong first three quarters. According to Destatis, on average for 2022, prices for residential real estate rose by a total of 5.3 percent compared to 2021. In 2021, prices rose by 11.5 percent, the fastest since the time series began in 2000.
Stabilization of real estate prices in 2023?
Experts were surprised by the extent, but can see something positive about the decline – after all, the Bundesbank has long been warning of an overvaluation of 25 to 40 percent in the cities. “The fact that prices fell in the fourth quarter shouldn’t surprise anyone,” said economist Martin Güth from Landesbank Baden-Württemberg (LBBW).
“But the pace makes you sit up and take notice.” There is no doubt that a correction has set in on the residential real estate market, which is likely to continue. “This is a healthy development,” said Güth. “The market is highly valued and housing is hardly affordable anymore.”
Initial indications for the current year show a temporary stabilization at a lower level. At least that is what the house price index of the financing platform Europace shows, which is based on real transactions. Accordingly, real estate prices in February rose slightly by 0.59 percent compared to the previous month. Especially at the end of 2022, there were still significant discounts here, as with the official figures from Destatis.
After the prices for new buildings continued to move upwards in the figures for January, this development is now also evident for existing single and two-family houses with an increase of 0.52 percent, according to Europace. New buildings increased in price by 1.33 percent compared to the previous month. Only in the case of condominiums has the downward trend observed since last June continued, albeit only slightly with a minus of 0.2 percent.
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Stefan Münter, Co-CEO at Europace, said about the figures last week: “Even with difficult framework conditions, we see noticeable demand for real estate.” Around 20 percent of construction financing for private customers in Germany is processed via the company’s platform, among other things via the intermediary Dr. Small.
Price developments on the real estate market are difficult to assess
However, price developments are difficult to assess accurately in the current situation because there are only a few transactions overall and the market is still in a state of shock. Sellers often hold on to high prices while buyers wait for prices to drop further. The industry does not expect the market to really pick up again until monetary policy has stabilized and it is clear how much interest rates will rise.
Jochen Möbert, analyst at DB Research, recently made a simple calculation: “Assuming financing costs of four percent and no growth in rents, then prices have to fall by 25 percent for rental returns to break even again.” That’s what the investors expected from the start a positive cash flow, then even more significant price declines are necessary.
In a further evaluation, however, Möbert also sees the inflation protection of real estate in the current situation. “In the long term, prices should be able to reach new highs,” he concludes.
Real estate prices are unlikely to drop any further
According to the current figures from the Federal Statistical Office, the German Economic Institute (IW) does not assume that prices will fall much more this year. Real estate economist Michael Voigtländer sees three main reasons for this:
First, most investors expected interest rates to come back down in the second half of the decade, once central banks’ monetary policies had brought rising inflation under control. “This expectation stands in the way of price reductions that are too great today,” writes the IW.
Secondly, with the current rise in interest rates, construction activity is also falling significantly, since project developers are unable to find buyers for their new buildings and are therefore postponing the implementation of the projects. “Therefore, there is a risk of a significant decline in completions this year, which will increase the shortage in the market,” says Voigtländer.
Thirdly, the demand for residential real estate would increase at the same time. The Federal Statistical Office recently reported record immigration to Germany in 2022. Overall, the population has grown by 1.2 million people, which corresponds to an additional housing requirement of around 600,000 apartments. “In addition to refugees, immigration has increased primarily due to the influx of skilled workers – given the need, this is likely to increase further,” says the IW.
More: These apartment types and districts are able to withstand the price slide.