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PROPERTY

Why Germany’s property boom could be coming to an end

For the first time in over a decade, property sales in Germany appear to be falling, fuelling speculation that the country's soaring real estate market could be experiencing a reversal in fortunes.

Apartment buildings in Dresden's Old Town
Apartment buildings in Dresden's Old Town. Photo: picture alliance/dpa | Robert Michael

For more than a decade, the property market in Germany has been growing at a dizzying pace. But according to a new report by the Hamburg-based Gewos Institute for Urban, Regional and Housing Research, this period of rapid growth could be coming to an end.

In 2022, sales of flats, houses, commercial property and land are likely to fall by seven percent €313.5 billion and the number of purchases is expected to drop below 900,000.

For its study, Gewos analysed data on finalised property purchase contracts and the associated turnover. 

Based on the data for the first half of the year, a decline in turnover in the German real estate market is expected this year “for the first time since 2009”.

READ ALSO: Why house prices in Munich are starting to fall

Since May, the number of purchases, sales and especially large transactions have been falling compared to the same period in 2021, explained Sebastian Wunsch, Head of Real Estate Economic Analyses at Gewos.

Last year, turnover in real estate reached a record value of €337 billion, representing an increase of 14.5 per cent compared to the previous year and more than double that of ten years ago.

While the number of purchases fell slightly due to a lack of supply, prices for houses and flats shot up by around 13 percent. These were the strongest increases since records began in the 1980s.

According to Wunsch, this “absolutely exceptional year” was partly down to a rebound in the housing market in the aftermath of the Covid crisis and a huge boom in transactions in Germany’s largest cities. 

But conditions on the housing market are making it increasingly difficult for both private buyers and investors to conclude property purchases, he said.

For people looking to buy their own home, the combination of high inflation and rising interest rates means that purchasing power is reduced at a time when mortgages are getting pricier.

Investors, on the other hand, are holding off on purchases due to the uncertainty in the market. This has led to a slowdown in real estate transactions. 

‘No drop in house prices’

Despite the decline in purchases, Gewos doesn’t believe that house prices are set to drop just yet.

According to the report, the pressure on the German housing market remains high due to strong levels of immigration and the slow pace of construction. 

“There is no sign of an across-the-board price decline, let alone a sudden drop in prices,” said Wunsch.

However, Gewos does expect residential property prices to grow at a slower rate, with increases of around three percent this year.

“Regionally and in certain locations and submarkets – such as for unrenovated existing properties – price declines cannot be ruled out either,” Wunsch added. 

According to Gewos, the residential property market, which accounts for almost 80 per cent of transactions in this country, is also likely to fare somewhat better than the property market in general.

In 2022, turnover in flats and houses will probably fall by around 5.6 percent to just under €240 billion.

READ ALSO: The rules foreigners need to know when buying property in Germany

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PROPERTY

Why house prices in Munich are starting to fall

The real estate market in the southern German state of Bavaria is changing due to the precarious economic situation, a new report has found.

Why house prices in Munich are starting to fall

What’s happening?

Germany’s largest state – Bavaria – is known for many positive things, such as stunning nature, culture and festivals. But it also has a reputation for being an expensive place to live. Many cities, especially Munich, are notorious for having some of the highest rental and property costs in the country. 

But it looks like the trend of rising house prices is beginning to dampen. 

According to the latest report by the Real Estate Association Germany South Region (IVD Süd e.V.), inflation and increased mortgage interest rates have put an end to the period of significant hikes in the Bavarian real estate market – at least for the time being. 

“The rapidly growing financing costs and the uncertainties associated with the impending recession in Germany as a result of the Ukraine war are inhibiting the dynamics of market activity and, in particular, the price dynamics in the residential real estate market,” said Professor Stephan Kippes, head of the IVD market research institute.

It reflects a general trend that we’ve been starting to see in Germany as the tough economic situation bites. 

According to a recent study by property search portal ImmoScout24, the number of people buying houses in Germany fell dramatically in the second quarter of 2022. And In many of the major metropoles, property prices also went down as people struggled to find interested buyers.

READ ALSO: How property prices are dropping in major German cities 

Where can we see this trend?

The price changes can be seen clearly in the state capital Munich, reported regional broadcaster BR24.

According to the study, the average property price, which was €9,500 per square metre in spring, has now dropped to €9,450. 

In some Bavarian cities, the trend reversal is not yet as noticeable. In Nuremberg, for example, property prices are still rising but at a slower rate than previously seen. The price of a property in spring was on average €3,630 per square metre, and is now €3,710, according to the study. 

Experts say it shows how the situation is developing. 

“The state capital of Munich, where the first price declines for residential real estate were identified in the fall of 2022 for the first time in a long time, could serve as a seismograph for future developments in Bavaria’s large and medium-sized cities,” said Kippes. 

Homes in Erfurt, Thuringia.

Homes in Erfurt, Thuringia. Photo: picture alliance/dpa | Martin Schutt

Interest increases for buyers

At first glance, this development could seem tempting for those looking to buy property in Germany.

But Kippes points out that buyers are hardly benefitting from the decreasing prices – because interest rates have risen. 

“A few months ago, you could get an interest rate of 0.8 percent,” said Kippes. “If we take a purchase price of €500,000, let’s assume that €150,000 is equity and a €350,000 loan is needed; two percent repayment, 10 years fixed interest rate. Then, you would have paid €817, but today it would cost you €1,473.”

The IVD study said that the historically low-interest rate level of the past years in Germany “made it possible to compensate, at least partially, for the massive increases in purchase prices in many places”.

READ ALSO: The rules foreigners need to know when buying property in Germany 

“Now that the relief provided by low-interest rates has largely disappeared, but at the same time purchase prices have remained at dizzying heights, owner-occupiers in particular, who traditionally often finance with a high proportion of borrowed capital, are increasingly dropping out as buyers,” said the study. 

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