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Germany house price crash: Frankfurt, Munich among most overheated global property markets

By Nicole Willing

Edited by Valerie Medleva

16:33, 10 November 2022

 terraced houses in a small settlement in huerth
Property prices are increasing at a slower pace in Germany after peaking in the second half of 2021. Photo: StockTom / Shutterstock

With housing markets contracting in several countries, in Germany, property prices are increasing at a slower pace as higher living costs and mortgage rates weigh while housing shortages prevent a sharp fall.

Will there be a German house price crash or will prices continue to rise at a lower rate? 

In this article, we look at the nation’s real estate market and analyst forecasts for how it could fare heading into 2023.

Housing crash explained

What is a housing market crash? Real estate prices typically rise and fall in cycles, in which peaks or bubbles – when average prices exceed their fundamental value – end in a market slowdown. When prices reach their peak, they can sometimes collapse rapidly.

Housing bubbles can occur when demand from buyers increases quickly, often encouraged by excessive lending. When economic conditions change and property owners can no longer afford to pay their mortgages, they can be forced to sell, which increases the supply of properties on the market and causes prices to crash. 

The house price cycle in Germany developed differently to other European countries, remaining stagnant for two decades to 2010 and avoiding the massive crash seen in many countries in 2008. 

The last major Germany house price crash was in 1998, fuelled by post-reunification tax breaks. The country’s real estate prices slowly declined in 2000-2008, but began to accelerate rapidly from the second half of 2010, raising concerns that a bubble was forming.

Germany House Price Index

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What is driving the German housing market?

Germany had the lowest homeownership rate in the European Union at 50.4% in 2020, according to Dutch bank ING, as renting is more affordable. House prices climbed by 39% between 2015 and 2020, compared with a 7% increase in rents. In the fourth quarter of 2021, house prices increased 12.2% year-on-year.

Germany saw the highest price increases for residential property since the 1980s last year, after the Covid-19 pandemic delayed sales in 2021, according to a report from the Gewos Institute for Urban, Regional and Housing Research.

In the 10 most populous German cities, transaction activity increased significantly in 2021 after a weak 2020. There was a 7.7% increase in purchases of apartment buildings.

But the combination of high inflation, rising interest rates and a slowing economy has fundamentally changed the German real estate market since the start of the year, according to the report. Owner-occupier property purchases are becoming increasingly difficult owing to rising financing costs and falling real wages. Real estate investors are facing significantly lower risk premiums as uncertainty around future price developments increases.

The fall in the value of the euro (EUR) to below parity with the US dollar (USD) – seen in the EUR/USD currency pair – at times this year has contributed to inflation through the higher costs of imports and the strength of the US dollar is changing investment capital flows. 

Higher energy costs, rising prices for construction materials and increasing financing interest costs saw 16.7% of companies surveyed by the IFO Institute cancelling residential construction projects in September, up from 11.6% in August. New housing construction is set to remain below government targets to address housing shortages in some cities.

The House Price Index published by the German Statistics Office showed a 10.2% rate of growth in the second quarter of 2022, down from 11.6% in the first quarter, 12.6% in the fourth quarter of 2021 and a peak of 12.8% in the third quarter of last year.

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What do analysts expect for the German real estate market as price increases slow down?

Will there be a German house price crash?

While the Gewos Institute expects the German housing market to cool after a record year of €337bn in real estate sales in 2021, it has not so far predicted that the market could crash. 

The Gewos Institute’s Sebastian Wunsch said:

"Based on our survey data from the first six months, we expect in 2022 as a whole, for the first time since 2009, there will be a decline in monetary turnover on the German real estate market." 

The Institute noted the market began to cool in April after a strong start to the year. It expects nationwide property sales volume to fall by 7% to around €313.5bn in 2022, with the number of purchases falling below 900,000 for the first time since 2014. But the market for residential real estate is forecast to be slightly more positive than the market as a whole, with sales increasing by 5.6% in 2022 nationwide to around €239.7bn.

But there could be a divergence in regional markets, with some price drops possible. According to Swiss bank UBS’s Global Real Estate Bubble Index 2022, Frankfurt and Munich show the highest risks of a property bubble among the eurozone markets it covers. 

Both cities have seen prices more than double in nominal terms over the past 10 years. In Munich, an “ultra-low vacancy rate” and growing workforce has supported the market, but a subdued economic outlook in Germany presents a drag on demand. Higher interest rates have already reduced mortgage affordability. The report continued:

“Double-digit price gains have come to a halt in Frankfurt´s housing market. Nominal property prices rose by 5% between mid-2021 and mid-2022 – just half the average growth rate in the past five years as well as the national average. The recent cooling masks a stunning rise: Frankfurt’s nominal housing prices are currently still more than 60% above their levels five years ago. In this period, price growth has significantly outpaced income and rental growth in a major decoupling from fundamentals. Investment demand has played a crucial role in driving up prices. While the market imbalances have slightly decreased of late, Frankfurt’s housing market remains in bubble risk territory.”

The report added that “the combination of rising financing costs and little economic growth in 2023 should deflate some of the market exuberance”.

Earlier this year, Germany’s Deutsche Bank predicted that “the cycle will probably end in 2024. Prices will not necessarily undergo a massive correction from their peak. In the past, prices regularly collapsed after a systemic crisis.”

The bank’s analysts noted: “Our projections suggest that the fundamental supply shortage is nearly over in Bremen, Dusseldorf, Hamburg and Nuremberg. As a result, rate sensitivity is probably quite high in these cities. In contrast, housing will probably remain in short supply in Berlin, Hanover, Cologne, Leipzig and Stuttgart for some years to come.” 

The German House Price Index published by Eurospace decreased to 221.83 points in September, down from 222.97 points in August and 224.87 in June. At the time of writing (10 November), analysis from data provider Trading Economics expected the index to rise to 232.50 points by the end of the quarter, and trend higher to 248.78 points in 2023 and 257.74 points in 2024, based on its econometric models.

The bottom line

Ultimately, whether the market slowdown could result in a German house price crash could depend on how high the European Central Bank (ECB) raises interest rates and the impact on mortgage rates, inflation and Germany’s economic growth.

If you are considering investing or trading based on the German property market outlook, remember that analysts’ forecasts can be wrong. Always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision.

Keep in mind that past performance is no guarantee of future results. And never invest or trade with money you cannot lose. 

FAQs

Are house prices dropping in Germany?

House prices in Germany are dropping, but they have been increasing at a slower pace in 2022 after peaking in the second half of 2021.

Is Germany having a housing crisis?

Some German cities are at risk of housing bubbles, as demand is outpacing supply and prices have risen rapidly over the past five years.

Is Germany in a housing bubble?

The German cities of Frankfurt and Munich show the highest risks of a property bubble among the eurozone markets covered in Swiss bank UBS’s Global Real Estate Bubble Index 2022.

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