German Real Estate: Germany’s once-thriving property market is hitting a stumbling block, and the outlook is bleaker than anticipated. Analysts are forecasting a substantial dip in home prices this year and the next, pointing to the European Central Bank‘s aggressive interest rate hikes, a staggering 450 basis points in just 15 months, as the culprit. A recent Reuters poll with 14 property experts suggests an 8.0% decline in average home prices for 2023, followed by a 2.8% drop in 2024.
What was a bustling real estate landscape in Europe’s largest economy has taken a dramatic turn, with prices nosediving over 10% since reaching their pinnacle last year. The one-two punch of high-interest rates and escalating living costs, courtesy of inflation, has coerced many households into opting for renting over the allure of homeownership.
This seismic shift has triggered the most substantial crisis in Germany’s property sector in decades, with reports of developers filing for insolvency and a significant 30% drop in construction activity compared to the preceding year.
Sebastian Schnejdar, Senior Real Estate Analyst at BayernLB, explains, “Higher interest rates forced about half of all potential buyers out of the housing market, leading to price reductions in the German housing market in this and the next few years. Additionally, there was a significant rise in the overheads for heating, electricity, and communal fees, increasing the costs of housing for homeowners.”
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Despite the government’s recent unveiling of a 45 billion euro ($47 billion) support package for the property sector and initiatives to stimulate house construction, the trajectory for the housing market remains grim. The anticipation is that weak economic activity in the coming quarters may prolong the recovery for the property sector.
The survey indicates a potential improvement in purchasing affordability for first-time homebuyers over the next year, according to 11 out of 14 analysts. However, 10 of the 14 contributors foresee a worsening supply of affordable homes over the next 2-3 years. The pendulum is swinging towards renting, with rising demand exerting pressure on the market and rent increases outpacing salary growth.
In Berlin, where affordable apartments were once in abundance, the vacancy rate is now less than 1%. The median forecast from 12 property experts predicts rental prices to climb by 4.0% or more until 2026. Despite the current trend, the proportion of homeownership to renters is expected to decrease over the next five years, according to 11 of the 14 analysts, marking a shift from the previous decade’s trend toward landlords.
Carsten Brzeski, Global Head of Macro at ING, emphasizes that Germany, even in the era of low-interest rates, remains the “land of tenants,” with the new higher interest rate environment making it increasingly challenging for more people to buy property. The expectation is that immigration will further boost demand for rental properties. The German real estate market, once a beacon of stability, now navigates choppy waters.
Our Reader’s Queries
Can you buy property in Germany as a foreigner?
Foreigners face no restrictions when it comes to buying real estate in Germany, unlike in other countries like Denmark and Switzerland. As a result, many foreign buyers are investing in properties in major German cities like Berlin, Frankfurt, and Munich.
How much is the average house price in Germany?
Prospective homebuyers in Germany may be hesitant due to the country’s high average bid price for new dwellings. At 4,800 euros per square meter, Germany ranks second in Europe, trailing only Austria by a mere 125 euros. In comparison, France lags behind by approximately 260 euros.
Are real estate prices dropping in Germany?
In Q3 of 2023, German property prices experienced a significant decline, with an average drop of 10.2% compared to the same period in 2022. This marks the largest decrease in property prices since records began in 2000, according to data from Destatis.
Is it wise to buy a house in Germany?
Investing in real estate in Germany is a smart move, thanks to the attractive financing options available. Compared to other countries, Germany offers some of the lowest interest rates, ranging from 1.25% to 2.50% for traditional rental properties. This translates to more savings and higher returns on your investment.