Rays of hope for German house prices

Prices for residential property in Germany have already fallen significantly and the correction is likely to continue in the coming months.

Dr. Marco Wagner

Commerzbank Economic Research

April 26 2024

Although the number of property transactions has only increased slightly so far, according to an ECB survey of banks, demand for property loans has at least picked up somewhat.

Price correction in full swing

Prices for German residential property have fallen significantly since mid-2022 (title chart). This was triggered by the massive rise in interest rates in the wake of central banks ramping up their key rates to fight inflation. According to data from the Federal Statistical Office, prices for existing residential property in particular have fallen. At the end of last year, these were 14% lower on average than at their peak in spring 2022. New builds recorded a much smaller drop of 5%.

Low turnover points to further downside potential

The price correction is unlikely to be over yet. Despite the fall in house prices, the number of transactions is still significantly lower than before the rise in interest rates. There is clearly still a large gap between the price expectations of buyers and sellers, which has arisen due to the fact that many potential buyers are unable to finance a property purchase at current prices under the current financing conditions.

However, many potential sellers of existing properties are apparently not prepared to make any noticeable price concessions, even if they bought their properties a long time ago and at significantly lower prices than they could currently achieve, i.e. they are ‘only’ foregoing some of their profits. Many, on the other hand, continue to orientate themselves on the prices achievable three years ago. This is all the more true as, according to a recent Bundesbank survey , 40% of private individuals still expect property prices to rise in the next twelve months. For this reason, prices for existing properties are likely to have fallen in the last two years primarily because some owners have had to sell their properties for various reasons (e.g. relocation, divorce, death). In the long term, however, other owners are also likely to realize that they will not be able to achieve the prices from 2021 for the time being and will have to make price concessions.

How much further will prices fall?

The Bundesbank's estimates in its monthly report for February show that prices would still have to fall in order to be back in line with their long-term determinants such as interest rates and income. Compared to the first quarter of 2024, it estimates that there is still potential for a further correction of 5% to 10%.

Our affordability index, which compares the debt service when purchasing a property (interest and repayments) to income, tends to favor the lower end of this range. This is because rising incomes and the fall in house prices in the meantime have already made them somewhat more affordable again (Chart 1). If incomes continue to rise substantially and interest rates for 10-year mortgage loans remain at the current level of around 3.5%, a further 5% fall in house prices would be enough to push the affordability index to a similar level by the end of the year as in 2010, when the property boom began.