During the first half of 2023, there has been a significant decrease in German house prices. This decline can be attributed to several factors, including increased borrowing costs, inflation, and a slowdown in economic growth. As a result of these influences, experts now characterize the current state of the housing market as a shift from a seller's market to a buyer's market. The drop in property prices, combined with a decrease in housebuilding activity and uncertainties in regulations, has led to a prevailing sense of uncertainty and caution among potential investors.
According to data from Europace, house prices for existing homes in Germany experienced a substantial year-on-year decline of 13.1% in June, marking the largest drop since October 2004. In May, the decline was slightly lower at -11.7% YoY. Similarly, prices for newly constructed homes also saw a decrease of 10.5% YoY in June, up from -12.1% YoY in May. These declines can be attributed to reduced demand, driven by higher financing costs and persistently high inflation. The sharp decrease in purchasing prices highlights the considerable challenges faced by the German housing market.
Adding to the concerns, the housing market in Germany is also witnessing a decline in housebuilding. According to the Federal Statistical Office (Destatis), the number of new building permits has dropped by a significant 31.9% compared to the previous year, signalling a worsening housing shortage. In April, only 21,200 new homes received approval for construction in Europe's largest economy, marking the most substantial decline since March 2007 after nearly a year of continuous decrease.
One of the contributing factors to the declining investor confidence in the real estate market is the uncertainty surrounding new regulations, particularly those aimed at improving energy efficiency in homes. The lack of clarity regarding future refurbishment obligations has made real estate investments less appealing to investors, leading to hesitancy in the market. This uncertainty also affects potential buyers, who are reluctant to make property purchases due to the perceived risks associated with unclear regulations, resulting in a decrease in real estate transactions.
The data reflects the growing affordability issues experienced by many Germans, further contributing to the decline in real estate transactions. The increase in mortgage rates, with a 10-year fixed rate rising from approximately 1% to about 3.9% since the beginning of the year (according to Interhyp data), has made homeownership less accessible for many. Monthly repayments on typical 10-year mortgages have significantly increased, putting more strain on potential buyers. This situation is unlikely to improve significantly in the short term as the European Central Bank (ECB) continues its policy of tightening.
Leading financial institutions have projected further declines in German house prices. Deutsche Bank predicts a total drop of 20 to 25 percent from peak to trough, indicating a challenging market ahead. Additionally, a UBS report identifies Frankfurt and Munich among the top four cities in its Global Real Estate Bubble Index for 2022, classifying them as having "pronounced bubble characteristics." These forecasts underscore the potential challenges and risks that lie ahead for the German housing market in the coming months.
The German housing market is currently experiencing a significant shift, as falling 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 a decrease in 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.
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