According to the Bundesbank’s Monthly Report, the German housing market has been impacted by the rise in financing costs and high inflation. “As a result, financing scope tightened for many prospective buyers and housing demand eased,” the Bundesbank’s experts write in the current issue of their report. House prices continued to rise up until the middle of 2022 but in the second half of the year fell quite significantly for the first time in a long time. By contrast, price pressures came from the massive increase in construction prices and the slow pace of the expansion of housing supply According to the report, residential real estate in Germany continued to be overvalued on an annual average overall.

End of many years of rising house prices

According to data from the Association of German Pfandbrief Banks (vdp), prices for residential real estate in Germany rose by 9% last year. The bulk of the price growth took place in the first half of 2022, while prices fell in the second half of the year. A similar picture is painted by the Destatis House Price Index published by the Federal Statistical Office, which was up by a significant 8.6% on average in the first three quarters of 2022 compared with the same period of the previous year. Prices subsequently remained virtually unchanged relative to the preceding quarter in 2022, however. According to Hypoport AG’s Europace house price index (EPX), house prices in Germany rose by 7.7% on average in 2022 yet, in the fourth quarter, dropped below their level at the end of 2021. “All three indicators therefore signal that the years of upswing in the residential real estate market are over,” the Bundesbank’s experts write.

Property prices in German towns and cities rose more slowly in 2022, but remained high

According to calculations based on annual data provided by bulwiengesa AG for 127 German towns and cities, house prices rose by 6% on an annual average in 2022, which is somewhat weaker than in the past. At 6.2%, price growth in the seven major cities was also down on the year. The seven major cities are Berlin, Cologne, Düsseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart.  vdp quarterly data also show that, at 7.9%, residential property prices rose considerably more slowly in the seven major cities in the reporting year than one year earlier. Furthermore, prices in these cities declined at an above-average rate in the final quarter.

Prices for newly rented apartments higher in 2022 than for many years

In contrast to prices, rents for new lettings in Germany increased at an accelerated rate over the course of the year, the Monthly Report states, up from 3.7% in the first quarter to 6.5% in the final quarter year-on-year according to vdp data. On an annual average, rents for new lettings saw the strongest rise since the start of the property market upswing at the beginning of the last decade. According to calculations based on data provided by bulwiengesa AG and vdp, rents in towns and cities, including major cities, went up more strongly than in the previous two years.

High construction costs, fewer dwellings and many properties overvalued

Tenants and prospective buyers saw their financial scope diminish last year. Disposable income rose sharply, rising by just over 7%, but according to the Monthly Report high inflation more than offset this contribution to purchasing power. In addition, the interest on mortgage loans rose sharply to an annual average of 2.6%. “This significantly increased the cost of credit-financed residential property purchases and is likely to have severely dampened demand for residential real estate,” the experts write.

According to the report, the expansion of the housing supply also lost considerable momentum in 2022. The scarcity of raw materials and building materials, on top of the existing labour shortages, caused prices of construction materials to soar. “The sharp rise in construction prices has made new builds financially less attractive than existing properties,” the report states. The rapid and massive rise in prices for construction materials also hampered the planning of construction projects. As a result, the number of cancelled construction projects shot up dramatically in 2022. Overall, according to an assessment by the Bundesbank’s experts, fewer dwellings were completed than the almost 295,000 units in the previous year. The number of new permits for housing construction also declined over the course of the year and, at an estimated 355,000 units, was down on the year.

According to the Bundesbank, residential real estate remained overvalued on average in 2022. This means that the slight decline in property prices in the second half of 2022 only partially offset the very strong increase at the beginning of 2022. According to estimates by Bundesbank experts, real estate prices in urban areas were between 15% and 40% above the level suggested by the socio-demographic and economic fundamentals. In the reporting year, on an annual average, the price-rent ratio for housing units in towns and cities was still just over 30% above its longer-term mean, and in the seven major cities, around 40% above its longer-term mean.