Last year, prices on the residential real estate market fell again for the first time due to the sharp rise in construction interest rates – after years of increases. Now the prices are hardly going down. But interest rates remain high.
After real estate prices only knew one upward direction between 2009 and 2021, the boom in the home ownership market came to an abrupt halt with the interest rate reversal by the ECB last year. For the first time, market prices fell again. But after the noticeable declines, the prices for residential real estate are hardly falling any more.
This is shown, among other things, by new figures from the Association of German Pfandbrief Banks (vdp). Apartments and houses were only 0.9 percent cheaper in the second quarter compared to the first quarter. Compared to the same quarter of the previous year, however, there was an average minus of 5.4 percent, the association reported. “The downward momentum in real estate prices has eased noticeably,” it said.
Mortgage Banks: stabilization is evident
In the case of owner-occupied residential property, prices fell only slightly in the second quarter by 0.4 percent compared to the previous quarter, while the discounts for apartment buildings were somewhat larger. “There are signs of stabilization on the residential real estate market,” said vdp CEO Jens Tolckmitt. One reason is that construction interest rates have recently leveled off at an elevated level. “There is increasing confidence in the market that long-term lending rates will not rise much further.”
Overall, the dynamics of the price decline in the first half of the year have decreased, also stated the mortgage lender Interhyp. “Over the whole of 2022, average prices fell by 7.5 percent. In the first half of 2023, they were only 3.2 percent,” says Interhyp CEO Jörg Utecht. According to the mortgage lender, real estate prices between April and June remained almost unchanged compared to the first quarter.
City house prices are rising again
The Greix real estate price index of the Kiel Institute for the World Economy (IfW) also shows that real estate prices have stabilized in the second quarter. The “German Real Estate Index” measures the 18 largest cities in Germany. For the second quarter, Greix identified differences between condominiums and single- or multi-family houses: The prices for condominiums fell slightly by 0.3 percent in the second quarter of the year compared to the first; the prices for single and multi-family houses, on the other hand, rose by 2.4 and 1.8 percent respectively.
The latest Greix figures show that the fall in prices on the real estate market is flattening out and that prices are already increasing regionally, said Moritz Schularick, President of the IfW Kiel, about the figures. However, it remains to be seen whether a trend reversal towards rising prices has already been heralded. “Following a historically unusually sharp and rapid fall in prices, as we have seen, a phase of countermovement is quite normal, which could be followed by repeated price declines.”
Fall in price as a result of the rise in interest rates
The main reason for the recent drop in real estate prices is the sharp increase in interest rates on loans, which make financing more expensive. Currently, building interest of more than three percent is due for a ten-year fixed interest rate. For comparison: Even before 2022, banks were offering mortgage loans of 1 percent.
According to the Federal Statistical Office, in the first quarter houses and apartments had become cheaper by an average of 6.8 percent compared to the same quarter of the previous year and by 3.1 percent compared to the previous quarter. Official data for the second quarter are still pending.
Highest price declines in Frankfurt and Munich
According to the study by the Pfandbrief banks, residential real estate prices in the seven major cities fell by an average of 1.1 percent on the previous quarter and by five percent year-on-year. The smallest discounts were in Berlin with minus 3.6 percent within a year. The highest price declines were recorded in Frankfurt (minus 9.1 percent), Munich (minus 6.7) and Hamburg (minus 6.4). Only in Düsseldorf did prices rise minimally (plus 0.1).
The vdp index is based on data on real estate transactions from more than 700 banks and differs from figures based on advertisements. When selling real estate, negotiations are carried out and deviations from the asking price are common.
Rental prices are rising sharply
Meanwhile, the upward pressure on the rental market continues, to which many people are forced to turn. New contract rents rose sharply in the second quarter by 6.2 percent compared to the same quarter of the previous year. “The demand for housing remains high,” said Tolckmitt. Berlin was at the top of the metropolises with an increase of 9.5 percent within a year.
According to the vdp calculation, the price declines in commercial real estate were again particularly large at minus 10.3 percent compared to the same quarter of the previous year and minus two percent compared to the previous quarter. While the trend towards working from home is having a negative impact on office properties, retail is suffering from online shopping and consumer restraint in the face of inflation.