Signs that boom coming to an end

Inflation and higher interest rates have led to the largest quarterly drop in housing prices in Germany in 16 years.

Germany’s Federal Statistics Office (StBA) confirmed yesterday that housing costs saw their biggest single-quarter drop in 16 years in the final quarter of 2022. At the same time, builders say they have received fewer orders for new housing.

The reasons cited for the surprising turnaround were rising inflation as well as the hike in interest rates undertaken by banks to combat it. Experts are anticipating the trend to continue into 2023.

The announcement was accompanied by data showing that both homes as well as apartments in cities and rural areas fell by an average of 3.6 per cent. The first quarter of 2007 was the last comparable drop recorded and at that time it was by 3.8 per cent.

StBA cites reasons for decline

Until the Q4 2022 drop, German housing prices had been on the rise since 2010. 

In a statement, the StBA said the pricing drop could be traced to a corresponding decline in demand as a result of rising finance costs and ongoing inflation.

Overall, prices for single family homes and duplexes in cities fell 5.9 per cent compared to Q4 2021. Prices for apartments fell an average of one per cent. Prices for homes in rural areas fell 5.5 per cent.

Prices in Germany’s seven most populous cities; Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf, also fell for houses (2.9%) and apartments (1.6%). Recent interest rate hikes have also soured investor enthusiasm as well as pricing individual investors out of the housing market.

Observers say the softening will likely continue into the year, with the German Institute for Economic Research (DIW), for instance, saying a 10 per cent drop in prices may be possible. According to Germany’s Bundesbank, housing prices in cities at the end of 2022 were overvalued by between 20-45 per cent.

Therefore, despite the “healthy development” announced Friday, experts say there is little danger of a housing crash. This has to do with the country’s housing shortage, where demand far outstrips supply.

Experts say the lull in new building will help maintain established prices. Economist Martin Güth of the Baden-Württemberg State Bank said the Q4 drop “shouldn’t surprise anyone, but the pace is an attention getter.”

Despite Friday’s announcement, overall 2022 housing prices rose 5.3 per cent, this came on the heels of an 11.5 per cent jump in 2021, the largest single-year increase since 2000. In light of the scarcity of affordable housing and a large influx of migrants most recently refugees from Ukraine, the German Federal Government had previously announced the goal of building 400,000 new apartments annually.