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Sharp Decline in Property Prices in Germany

Sharp Decline in Property Prices in Germany

In a recent analysis conducted by the Kiel Institute for the World Economy (IfW), the residential property market in Germany is experiencing a significant downturn, with prices plummeting across various housing types. The study, published on Thursday, reveals crucial insights into the areas where property prices in Germany are declining the fastest and sheds light on the factors contributing to this downturn.

Decline Across Housing Types

According to the IfW analysis, condominiums in Germany, also known as owner-occupied flats, saw an average price decrease of 1.5 percent between July and September compared to the previous quarter. The year-on-year decline was even more pronounced, reaching 10.5 percent. Detached homes and semi-detached homes also experienced notable drops, with decreases of 3.2 percent and 5.9 percent, respectively, in the last quarter.

Regional Disparities

The decline in property prices is particularly prominent in major cities. Notably, Düsseldorf and Stuttgart witnessed substantial drops, with condominium prices falling by over 17 percent and 15 percent, respectively. Other major cities, including Frankfurt, Hamburg, and Munich, experienced cumulative price declines exceeding 10 percent on average.

City-Specific Trends

In Germany’s seven largest cities, including Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Munich, and Stuttgart, apartment prices mostly fell in the third quarter, with the exception of a slight rise of 1.1 percent in Cologne. Düsseldorf recorded the steepest decline at minus 6.6 percent. While Frankfurt and Stuttgart saw more moderate decreases of 1.6 percent and 1.9 percent, respectively, Berlin remained relatively stable with a 0.8 percent decrease.

Beyond Metropolises

The decline in property prices extends beyond the major cities, albeit with varying intensity. Leipzig, Duisburg, Münster, and Erfurt experienced some of the most significant declines, ranging from minus 4 percent to minus 9.1 percent. However, outliers such as Chemnitz and Potsdam witnessed increases of 5.2 percent and 4.2 percent, respectively, in the third quarter.

Root Causes of the Crisis

The primary driver behind this trend reversal in the real estate market is the surge in interest rates, making mortgages more expensive. Persistently high inflation, diminishing purchasing power, is making it increasingly challenging for a significant portion of the population to afford property. This poses a considerable obstacle to homeownership. The European Central Bank’s decision to combat inflation by raising its key interest rate to 4.5 percent is continuing the crisis on the German property market. IfW President Moritz Schularick emphasized this attribution.

Impact on Market Dynamics

The consequences of this downturn are evident in transaction figures, with around a third fewer sales registered compared to the previous year. When measured against the average for 2019 to 2021, the figure drops by approximately 50 percent. Both sellers and buyers show reluctance to engage at current prices, as indicated by the decline in transactions. This poses challenges for new construction projects and impacts the country’s attractiveness for skilled workers.

As Germany grapples with a challenging real estate landscape, stakeholders are closely monitoring the evolving market dynamics. The urgency for adaptive measures is underscored by the IfW’s analysis, particularly in response to a housing market affected by interest rate hikes and inflation. This signals a turbulent period for the German property market, with the bottom still not in sight.

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