WIESBADEN (dpa-AFX) - An abrupt end to a long boom: Prices for houses and apartments in Germany fell more sharply in 2023 than at any time since the turn of the millennium. Residential real estate prices fell by an average of 8.4 percent compared to the previous year, according to the Federal Statistical Office on Friday. "This was the sharpest year-on-year decline since the time series began in 2000 and the first decline since 2007." Prior to that, residential real estate prices had risen steadily between 2008 and 2022. Banks expect the latest price decline to end this year as interest rates fall.

The decline also continued at the end of 2023, albeit at a slower pace: according to the Wiesbaden-based statisticians, prices fell by 7.1% year-on-year in the fourth quarter and by 2% compared to the previous quarter. In the third and second quarters, prices had fallen by an average of around ten percent year-on-year.

Cities particularly affected

The main reason for the real estate crisis is the sharp rise in interest rates, which have made loans much more expensive. Many people are no longer able or willing to afford their own four walls, and investments are no longer profitable for large investors. At the same time, demand for housing remains high, particularly in cities, not least due to the high level of immigration, while new construction is in crisis due to the rise in interest rates and expensive materials.

According to the statisticians, prices were on the rise at the end of the year in both urban and rural areas. In the seven metropolitan areas - Berlin, Hamburg, Munich, Koln, Frankfurt, Stuttgart and Düsseldorf - prices for detached and semi-detached houses fell by 9.1 percent in the fourth quarter compared to the same period last year, while condominiums cost 5.8 percent less.

In urban districts, the fall in prices for detached and semi-detached houses was particularly high at 11% compared to the same quarter of the previous year. Buyers there had to pay an average of seven percent less for condominiums. In sparsely populated rural districts, detached and semi-detached houses were down 6.9 percent and condominiums 2.8 percent.

Correction after unprecedented boom

However, the figures are average data. The price gap between modern, energy-efficient buildings and properties with high energy consumption is large. While buildings with old oil or gas heating systems and poor energy classes have lost a great deal of value according to studies, properties that are state of the art and consume little energy are selling for significantly more.

According to the Kiel Institute for the World Economy (IfW), the German real estate market saw the sharpest price decline in around 60 years in 2023. Never before since the expert committees began collecting purchase prices had property prices fallen "so quickly", the institute declared in February. However, the correction was appropriate: since 2009, property prices had risen three to fourfold, depending on the segment, thanks to low interest rates at the time, before the crash began in 2022.

Despite the fall in prices, the demand for living space remains unbroken - partly because very little is being built. The Ifo Institute expects only around 225,000 completions in 2024 after around 270,000 last year. The German government's former target of 400,000 new homes per year has long been out of reach.

Will falling interest rates bring a turnaround?

This year, banks are expecting the real estate crisis to come to an end - because the European Central Bank is expected to lower key interest rates in June as inflation falls. Building interest rates have already fallen significantly in anticipation of the interest rate turnaround: According to FMH-Finanzberatung, just under 3.5 percent per year was currently due for ten-year loans - at the end of October it was still over four percent. This makes real estate financing cheaper.

Landesbank Helaba, for example, believes that residential property prices are likely to stabilize in 2024. DZ Bank also expects the correction on the real estate market to slow down and prices to fall only slightly on average over the year. The peak in interest rates has probably been passed.

Banks' commitments for real estate loans to private customers have already risen again slightly at the start of the year. According to Bundesbank data, residential construction loans totaling almost 14.7 billion euros were granted in January, the highest figure since March 2023.

The Association of Pfandbrief Banks, which represents the most important real estate financiers in Germany, recently warned against too much euphoria. "A turnaround in real estate prices, which has often been speculated about in public, is not yet in sight," said Managing Director Jens Tolckmitt. "2024 will also remain difficult for the time being."/als/DP/mis