German House Prices Fell By Double Digits Amid Higher Mortgage Rates

German house prices have experienced a sharp decline in the first half of 2023. Factors such as higher borrowing costs, inflation, and weaker economic growth have contributed to the drop, prompting experts to label the current situation as a transition from a seller’s market to a buyer’s market. The decline in house prices, coupled with a slowdown in housebuilding and regulatory uncertainties, has created a sense of uncertainty and reluctance among potential investors.

According to Europace data, German house prices for existing homes fell 13.1% YoY in June (the largest decline since October 2004), down from -11.7% YoY in May. In the meantime, prices for newly built homes also decreased by 10.5% YoY, up from -12.1% YoY in May. These declines reflect the impact of reduced demand due to higher financing costs and persistently high inflation. This sharp decrease in purchasing prices highlights the challenges faced by the German housing market.

Slowdown in Housebuilding

In addition to falling prices, the German residential housing market is witnessing a decline in housebuilding. According to the Federal Statistical Office (Destatis), Germany is expected to experience a worsening housing shortage as the number of new building permits has dropped by 31.9 percent compared to the previous year. In April, only 21,200 new homes were given approval for construction in the largest economy of Europe, marking the most significant decline since March 2007 after nearly a year of continuous decrease.

Regulatory Uncertainties

Uncertainty surrounding new regulations, particularly measures aimed at improving energy efficiency in homes, has made real estate investments less attractive. Investors are hesitant due to the lack of clarity regarding future refurbishment obligations. As a result, potential buyers are uncertain about the risks associated with purchasing property, causing a decline in real estate transactions.

Affordability Challenges

The data reflects the growing affordability issues faced by many Germans, contributing to the decrease in real estate transactions. The surge in mortgage rates, with a 10-year fixed rate increasing from about 1 percent to about 3.9 percent since the start of the year (according to Interhyp data), has made homeownership less accessible for many. Monthly repayments on typical 10-year mortgages have seen substantial increases, further burdening potential buyers. This trend is unlikely to improve signficantly in the short term as the European Central Bank (ECB) is on track to tighten its policy.

Forecast and Bubble Concerns

Leading financial institutions have projected further declines in German house prices. Deutsche Bank forecasts a total drop of 20 to 25 percent from peak to trough. A UBS report even places Frankfurt and Munich among the top four cities in its Global Real Estate Bubble Index for 2022, characterizing them as having “pronounced bubble characteristics.” These predictions emphasize the potential challenges and risks faced by the German housing market in the coming months.

The German housing market is undergoing a significant shift as declining house prices, a slowdown in housebuilding, and regulatory uncertainties create a buyer’s market. Affordability challenges and rising mortgage rates have contributed to reduced demand and fewer real estate transactions. As the market grapples with these challenges, it remains to be seen how the German government and industry stakeholders will respond to stabilize the housing market and restore investor confidence.