German house prices still rising, but trend reversal looming

German residential house prices continued to rise strongly over the first three months of this year, increasing by an average of 12% over the same period last year, according to figures confirmed by Germany's Federal Statistics Office (Destatis) on June 24th. This compares to the year-on-year rise of 12.2% as at end-2021. It was the fourth time in a row that the quarterly rate of increase in the house price index was above 10%.

However, as compared to the previous quarter (Q4), apartments and both detached and semi-detached houses only rose in price be 0.8%, after prices had risen by 4.1% in Q3 last year and by 3.1% in Q4. As Destatis put it, "This indicates a slight weakening of the dynamics". It certainly does provide further evidence of a slowing down of the rate of increase, and a possible price trend reversal, as widely expected in many quarters.

The recent sharp rise in interest rates has seen noticeably falling demand for buying properties, down 17% year on year in the first quarter, according to online portal Immoscout24. Researchers from Stuttgart-based Landesbank LBBW added their warnings last week to the long-proclaimed dangers of overheating by the Bundesbank, with LBBW saying price falls of up to 20% are possible if interest rates continue their steep rise, and the economy gets stuck.

It is certainly taking longer for residential properties to sell from online advertisements than last year, says Immoscout. There has also been a sharp rise in people looking for properties to rent. According to Gesa Crockford, Immoscout24's managing director, "These developments could indeed have a dampening effect on price trends in the medium term." This might, on the other hand, lower overall costs for buyers, helping to cushion the blow of higher interest rates somewhat.

At the upper end of the market, the Immoscout24 figures show a sharp fall in demand for properties priced at €10,000 per sqm and above, where the time taken to sell these properties has doubled in some cases this year.

As an example, the number of contact enquiries in Düsseldorf has fallen by an average of 73% for this price category. In Cologne it was -46%, in Frankfurt -44%, in Hamburg -26% and in Stuttgart -12%. Only Berlin and Munich saw demand actually increase. It's hard to prove conclusively that this represents a general "trend reversal" to becoming a buyers' market, as new offered rent prices for new lettings have also risen sharply, the Immoscout24 figures show. Compared to the same period last year, these have increased in price nationwide by 4.6% for existing stock and by 7.6% for new-builds. These were most prominent in the major cities - those where demand remains the highest.

And it remains so that demand for buy-to-let properties remains still well above the level it was at end-2019, before the onset of the corona crisis.

New figures released this week from nationwide property association IVD also confirm the professionals view that the days of dramatic price rises in the residential sectors are numbered. Apart from certain localised markets, they expect prices to stagnate, after a period in which they have consistently risen faster and higher than rent increases.

The latest issue (the seventh) of their annual joint 'Wohnkosten' report by think-tank IW Cologne and Berlin-base housing privatiser ACCENTRO runs through some new calculations on housing costs as faced by tenants as compared to owner-occupiers.

Calculations are based on net 'cold' rents as well as the costs for owner-occupiers, of the purchase price, ancillary acquisition costs, mortgage interest and lost interest (opportunity interest) on equity as well as repairs and depreciation.

The study concludes that owner-occupiers lived more cheaply than tenants in all 401 German districts and independent cities in 2021 (previous year: 399), including in the country's biggest cities. They paid an average of €4.21 per sqm compared to new contract rents for comparable apartment of €10.30 per sqm.

That was the case for owner-occupiers until recently. But rising interest rates and higher cost-of-living expenses has changed that. Rising interest rates will "significantly reduce the owner-occupier cost advantage", admits Dr Michael Voigtländer of the IW Cologne.

However, "even in the most ambitious interest rate scenario, the costs would still be below the expected new contract rents - buying remains cheaper than renting", said Accentro CEO Lars Schriewer - while conceding that this probably applies mainly to the suburban areas around the big cities. The neutral interest rate (from which new contract rents correspond to owner-occupier costs) for the seven A-cities is 2.8% and thus slightly below the currently more realistic interest rate scenario of 3%.