Declining House Prices in Germany Amid Rising Interest Rates

Germany’s real estate market is experiencing a significant shift, with house prices decreasing nationwide, while rental rates for houses show varied trends across different regions.

This change in the property market landscape can be attributed to several factors, including rising interest rates and inflation.

In October, the average listed price for houses in the “Houses for Sale” category on classified ads platforms saw a dramatic year-on-year decrease of 24.2%, dropping from €614,262 in the previous year to €465,636. This decline is based on the analysis of prices for single and multi-family homes advertised within a price range of €10,000 to €7.5 million. The number of houses listed in this category also increased significantly, by approximately 60%, compared to the same month last year.

The price drops vary by state, with Brandenburg, Saxony, and Bavaria experiencing the most significant decreases of 38.3%, 36.2%, and 28.7%, respectively. In contrast, states like Hamburg, Saarland, and Bremen recorded the smallest declines.

While house prices are falling, rental prices for houses are presenting a mixed picture. Overall, the average rental price for houses saw a slight increase of 1.3% from October 2022 to October 2023. However, regional disparities are evident. For instance, rental prices in Bremen, Mecklenburg-Vorpommern, and Brandenburg showed significant decreases, whereas areas like Thuringia, Schleswig-Holstein, and Rheinland-Pfalz experienced considerable increases.

A separate study by the Kiel Institute for the World Economy (IfW) found that house prices in major German cities have also been declining, with a more than 10 percent year-on-year drop. This trend is evident in cities such as Düsseldorf, Stuttgart, Frankfurt, Hamburg, and Munich. The study attributes the decline mainly to rising interest rates, making mortgages more expensive and thus reducing the affordability of buying a house. This situation is compounded by high inflation rates, which further diminish purchasing power.

The downturn in the housing market is not just confined to house prices but also affects the volume of transactions. According to the IfW, there was a third fewer sales recorded across all housing types in the third quarter compared to the same period last year. This decrease indicates a significant slowing down in the market, with fewer sellers and buyers agreeing on current prices.

This downturn in the real estate market is a concerning development for the German economy and its attractiveness as a business location. The declining transaction figures, especially in new construction, underscore the challenges facing the housing market in providing affordable living spaces for the growing urban population and skilled workers. The current trends suggest that the bottom of the market downturn is yet to be seen, as noted by IfW President Moritz Schularick.