Property prices in Germany: Development & forecast

Property prices in Germany are rising continuously. Nevertheless, there is a glimmer of hope in the form of a turnaround. Although the price situation in the German real estate market continues to be uneven, changes are likely to occur primarily in condominiums and houses..

Property price development in Germany

The price situation for real estate in Germany still appears heterogeneous, so that no all-encompassing forecasts can be made for the entire market. However, a difference can be observed with regard to the construction model. While prices for new buildings are still expected to rise, the average purchase price for new detached houses and apartment buildings is falling. For existing condominiums as well as houses, prices continue to decline. Although this is often only a few percent, a direct comparison with the changes in the same month of the previous year quickly shows that there is a fundamental trend

With regard to property prices in Germany, the Deutsche Bundesbank explained in its monthly report that residential property is clearly overvalued on average for the year. For this report, the bankers incorporated several analyses by various institutes, which, among other things, took a closer look at the events of the previous year. For example, residential property prices rose by nine percent in 2022, with inflation concentrated in the first half of the year. The second half of the year saw price reductions. However, whether this situation will repeat itself in 2023 and beyond cannot be deduced from the analyses.

Fewer flats and rising rents

Rising construction interest rates as well as the immense increase in the cost of building materials and construction services have a significant influence on real estate prices in Germany. For this reason, fewer and fewer people are taking the step of owning their own home, as this decision is associated with ever higher costs. At the same time, this situation is leading to a worsening of the overall situation on the rental market. As a result, rents in metropolitan areas in particular continue to rise. In percentage terms, rents are rising more strongly than purchase prices. In major cities such as Berlin, Frankfurt, Düsseldorf, Leipzig and Munich, asking rents rose by several percent in the second half of 2022, while the increase in purchase prices was only just over one percent.

The stagnation in residential construction further exacerbates the overall situation. Over the year 2022, the number of building permits for new non-residential and residential buildings decreased significantly, according to data from the Federal Statistical Office. Even in newly constructed residential buildings, fewer dwellings were approved than in previous years. It is not yet possible to say how this situation will affect existing rents and new rentals. However, the low proportion of potential rental properties should ensure that suitable properties will find a tenant even with higher prices.

Forecast for property prices in Germany

The forecast for property prices in Germany foresees sharp falls. A decline of up to ten percent is possible according to the estimates of the German Institute for Economic Research, DIW for short. Above all, a worrying divergence between rents and purchase prices is expected to become apparent in the coming months and possibly years. In order to be able to make this forecast, the DIW prepared a study in which 97 cities throughout Germany were examined. It showed an increase in prices for owner-occupied homes and flats by an average of eleven percent. Rents, on the other hand, rose by four percent.

The DIW sees this divergence as an indication that real estate is currently taking on the role of a speculative object. At the same time, there could be price bubbles. The DIW did not disclose the extent to which these will manifest themselves. According to them, however, prices for both condominiums and houses are likely to fall by up to ten percent in the future. However, there should be no fear of the already existing huge real estate bubble bursting.

While rents for existing flats have been changing constantly for decades, prices for condominiums have been rising rapidly, especially in recent years. On the one hand, the currently prevailing prices are the result of excessively high demand in many places with a consistently low supply. On the other hand, more and more people are entering the rental market who have already given up their dream of owning their own property. For this reason, rents are still likely to increase significantly.

No nationwide price slide

Although the real estate market in large parts of Germany has literally put on the brakes, there is unlikely to be an across-the-board price slide in 2023. The actual development of prices depends largely on the location and condition of the property. Consequently, there is a clear difference depending on whether the property is located in a metropolitan region or rather away from sought-after residential areas.

Here you can expect more favorable property prices

It may come as a surprise that in large metropolitan regions property prices either remain stable or decrease slightly. In the so-called “Speckgürtel”, prices are likely to settle at the current level, as prices there are still cheaper than in the metropolitan areas. 

For cheaper prices, turn to the rural and structurally weak regions. In 2023, price reductions should become apparent in these areas.

Also becoming cheaper are those buildings that do not look desirable at first glance. Existing properties with either a poor energy balance or a high need for renovation should become more affordable. The fall in prices is largely related to the sharp rise in energy costs. Demand is falling due to this fact, causing the properties to lose some of their value.

Conclusion

The coming months and years are likely to see a strong change in the real estate market in Germany. While new buildings will continue to be adjusted with high rents, the cost of houses will decrease. It is impossible to say whether property prices in Germany will remain the same or whether the price bubbles will burst. The fact is that property in particular continues to be associated in part with high costs and there is no change in this regard.