Real estate prices are falling more sharply than in years


Lerato Khumalo

Even in big cities, real estate prices have fallen for the first time in a long time. Experts expect the trend to continue.

The rise in interest rates and high inflation have brought an abrupt end to the long real estate boom in Germany. In the final quarter of 2022, apartments and single- and two-family houses became cheaper than they have been for 16 years, the Federal Statistical Office announced on Friday in Wiesbaden. Experts expect the price decline to continue this year.

According to the Federal Office, residential real estate prices fell by an average of 3.6 percent in the fourth quarter compared to the same quarter last year. It was the first price drop within a year since the end of 2010. Prices last fell more sharply in the first quarter of 2007, at minus 3.8 percent compared to the first quarter of 2006, the statisticians wrote. “The main reason 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.” Compared to the third quarter of 2022, the price drop at the end of the year was even more significant at minus 5.0 percent – that was more than experts expected.

In both cities and rural areas, prices fell for the most part in the final quarter of 2022. Single- and two-family houses became cheaper than condominiums. Prices for single- and two-family houses in independent cities fell by 5.9 percent compared to the same quarter last year, while prices for condominiums fell by 1.0 percent. In sparsely populated rural areas, houses were 5.5 percent cheaper, while condominiums were slightly more expensive.

Even in the seven sought-after metropolises – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf – prices fell on average: 2.9 percent less had to be paid for single- and two-family houses, and 1.6 percent less for apartments than a year ago.

The figures clearly show the turnaround in the housing market after the long real estate boom since 2010 had driven prices ever higher. In 2022 as a whole, residential properties rose by 5.3 percent compared to the previous year due to the increases in the first three quarters. In 2021, however, the increase was more than twice as large at 11.5 percent.

The reason for the end of the boom is the key interest rate increases by the major central banks in the fight against high inflation, which also have an impact on building interest rates. For example, interest rates on loans with a ten-year interest rate fixation have quadrupled from just under one percent to almost four percent within just over a year. This means that the monthly rates for interest and repayment are hundreds of euros higher than before. Buying property is therefore no longer affordable for many people. In any case, many people are short of money due to inflation, and banks are examining financing more critically. Real estate agents report far fewer inquiries for properties than before.

The rise in interest rates has also led to a collapse in the construction financing business. According to the Bundesbank, new business including extensions in January was 12.7 billion euros – almost half less than in the same month last year. “Investors’ interest in real estate investments has fallen, while owner-occupiers’ financial feasibility has fallen,” said Michael Neumann, head of the credit broker Dr. Klein, recently.

According to experts, the trend of falling real estate prices is likely to continue. The German Institute for Economic Research believes a decline of up to ten percent is possible this year, while DZ Bank expects discounts of four to six percent. It is undisputed that the real estate market has recently been overheated. At the end of 2022, real estate prices in cities were 20 to 45 percent above the justified level, as calculated by the Bundesbank.

However, experts doubt that Germany is about to burst a real estate bubble. The housing market is considered robust, even in economic crises, because real estate is often financed conservatively and over the long term. Even if prices were to fall by a total of 15 percent over a longer period, the market would be at the level it was at the beginning of 2020, said Jens Tolckmitt, General Manager of the Association of German Pfandbrief Banks (vdp), recently.