German House Prices Fall by Record 6.8% as Higher Mortgage Costs Deter Buyers

In the first quarter of this year, the German housing market experienced a significant downturn. House prices fell at a record rate of 6.8%, marking the largest drop since the index began in 2000. This decline was largely attributed to higher borrowing costs, inflation, and weaker economic growth. But what does this mean for potential buyers and the German economy as a whole? Let's delve into the details.

The Impact on the German Economy

The First-Quarter Drop

The first quarter of this year saw a record drop in German house prices. The 6.8% decrease was the largest since the index began in 2000. This drop is a clear indication of the challenges facing Europe's largest property market. The higher borrowing costs, inflation, and weaker economic growth have all contributed to this decline.

The Role of Higher Mortgage Costs

Higher mortgage costs have played a significant role in the fall of German house prices. The best rate for a new 10-year mortgage worth €190,000 on a property worth €352,000 has risen from 0.43% at the start of 2021 to 3.39%, according to Dr Klein, a German mortgage broker. This increase in mortgage costs has deterred potential buyers, leading to a decrease in demand and subsequently, a drop in house prices.

The Effect of Inflation and Weaker Economic Growth

Inflation and weaker economic growth have also contributed to the fall in house prices. Inflation has remained persistently high, making it more expensive for potential buyers to finance a home purchase. On the other hand, weaker economic growth has led to uncertainty and caution among potential buyers, further reducing demand for homes.

The Shift in the German Housing Market

From a Seller's Market to a Buyer's Market

The German housing market has undergone a significant shift. It has transitioned from a seller's market, where demand is high and sellers can often command higher prices, to a buyer's market, where supply exceeds demand, giving buyers more bargaining power. This shift has been largely due to the higher financing costs and the persistently high inflation.

The Standstill in Transactions

The shift to a buyer's market has led to a standstill in transactions. According to Carsten Brzeski, a Frankfurt-based economist at Dutch bank ING, the official price index is almost a fiction because it is based on so few new transactions. This lack of activity in the market is a clear sign of the challenges facing the German housing market.

The Impact of New Regulations

New regulations, such as measures to improve the energy efficiency of homes, have added to the uncertainty in the market. Franz-Bernd Grosse-Wilde, chief executive of Spar- und Bauverein eG Dortmund, a housing association in the Ruhr city, stated that these regulations have made investments in real estate unattractive. This has further deterred potential buyers, contributing to the fall in house prices.

The Decline in House Prices Across Germany

The Fall in Urban Areas

The fall in house prices has been more pronounced in urban areas. The biggest declines were in Germany’s seven biggest cities — Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart, and Düsseldorf — where prices for single- and two-family houses were down 10.4% and those for flats fell 6.4%.

The Drop in Rural Areas Prices also fell in sparsely populated rural areas. The prices for single- and two-family houses dropped by 7.8%, and those for freehold flats declined by 5.3%. This widespread decline in house prices across both urban and rural areas indicates the breadth and depth of the challenges facing the German housing market.

The Affordability Crisis

The Struggle to Afford a Home

The data shows that many Germans can no longer afford to buy a house or flat. The combination of higher mortgage costs, inflation, and weaker economic growth has made home ownership increasingly unaffordable for many Germans. This has led to fewer real estate transactions and a slowdown in the housing market.

The Decline in Demand for Mortgages

The affordability crisis has also led to a decline in demand for mortgages. Since May 2022, demand for mortgages has been in decline, although there was a slight recovery in March. This decline in demand for mortgages is another sign of the challenges facing the German housing market.