German residential prices see slight downturn in July

It is difficult to get a real handle on what is happening to German residential real estate prices at the moment, given the plethora of conflicting reports coming in to us at REFIRE from all directions. Statistics about advertised real estate prices tell us one story, while the data about actual sales prices achieved often tell us another.

But we can take some things at face value. Leading German property portal ImmoScout24 points to a trend reversal in supply and demand, based upon advertisements published on its portal in July. A clear trend is that fewer people are looking for properties to buy, while demand for rental properties is being fiercely contested.

ImmoScout24 said that its figures for the second quarter shows that demand for buying residential accomodation has fallen by 36% compared to the same period last year, as a result of the sharp rise in interest rates since the beginning of the year.

Dr. Thomas Schroeter, CEO at ImmoScout24 says, "With the rise in interest rates in the second quarter, financing a property purchase has become significantly more expensive. This means that for many people the dream of owning their own property has been dashed, at least for the time being," The shift in demand from buying to renting had intensified within just one month, he said.

A year ago banks were offering to finance property at 0.7% for fixed term of ten years, which marked a record low. Mortgage broker Interhyp says the same loan is now closer to 3.4%.

To put this into perspective, as does national broker Dr. Klein, a typical loan of €300,000 for a borrower, paying down 2% of the loan value annually of the typically 80% loan-to-value being financed by the bank at a fixed rate for ten years, would now be paying €1293 per month - fully €488 more per month than a year ago.

Banks are also taking into account the cost-of-living increases being faced by borrowers, along with the fact that house prices have not yet significantly fallen, to make it also more difficult to borrow. As a consequence, the average amount being borrowed, where borrowers are going through with their purchases, has fallen by nearly 10%. This suggests they are either injecting more of their own equity capital, or are withdrawing from the purchase.

The emergence of sellers, perhaps fearful that the market has reached a peak, has been notable. In July the number of properties put up for sale on the portal, in both the big cities and nationwide, was well up on the figures for June. The strongest increase was in Munich with a plus of 18.5% compared to June. In Düsseldorf (plus 15.6%), Cologne (plus 14.4%) and Stuttgart (plus 14.2%), too, the supply of properties for sale rose significantly over the month.

By contrast to the increase in potential supply, the demand for properties for sale declined in all the big cities and throughout Germany in July - in Cologne by around 31% and thus the strongest. In Munich, the financially strong capital of Bavaria, the demand for single-family houses and owner-occupied flats also fell significantly by about a quarter (minus 26.1%). Hamburg demand was down 21.7%, and Berlin was down 20.8%. For Germany as a whole, demand fell by an average of 18% over the month.

While demand to buy is falling, demand to rent is surging. In Berlin, for example, demand for rental accomodation (based on ImmoScout24's advertisements) jumped 31%. On average, each advertised apartment for rent in Berlin is attracting 168 enquiries per week, while Munich enquiries per advertised apartment likewise jumped about 17%.

And all of this while actual supply of apartment accomodation is declining, at least for existing accomodation - down 12.6% in Berlin, down 10.8% in Cologne, down 10% in Frankfurt, down 8.6% in Düsseldorf, down 7.1% in Hamburg, down 6.4% in Stuttgart, and down 2.4% in Munich. The trend is slightly reversed for new-built accomodation, which is seeing some supply growth, but in many cases at top-of-the-range rents.

Immoscout24 claims that between January and July of this year, the offered prices (as advertised) have fallen for condominiums by an average of 6.4% per sqm in a majority of German cities and districts with more than 100,000 population. House prices have fallen too, but not by as much.

ImmoScout24's Dr. Gesa Crockford said: "There is a lot of movement on the real estate market at the moment. With a slight time lag, a change in property prices to weakened demand is becoming apparent. We are seeing more offers for purchase properties on the market, longer selling times for properties and a shift in demand towards the rental market."

Of course, advertised prices are not the same as prices actually achieved. Property valuation specialist Sprengnetter has analysed actual prices for deals transacted over six quarters to end-June 2022. Sprengnetter looked at data from a total of 1.4 million purchase properties and 320,000 purchase prices with a transaction sum of around €150 billion.

The Sprengnetter figures show purchase prices in the second quarter of 2022 DID actually fall for the first time compared to the first quarter of 2022. This was by 0.8% for single-family houses and 1.3% for condominiums across Germany. By way of comparison, the previous quarterly increases for single-family houses averaged 2.7% over the same period. For condominiums they ranged from 1% to 3.1%.

While prices have fallen marginally, says Sprengnetter, they haven't (or hadn't, by end-June) fallen to the extent suggested by the ImmoScout24 figures, which had also featured likely price falls of up to 30% in some really remote regions. The figures suggest nonetheless that price falls ARE now a feature in some big cities such as Cologne and Munich, but not in Hamburg or Berlin.

Based on his figures, Sprengnetter CEO Christian Sauerborn still views the market optimistically. "Based on the moderate price reductions across Germany as well as the forecasted stagnating construction interest rate increases, we're making the assumption that the shock suffered by the German residential property market will not last long." The market could shift in parts towards cheaper properties, he says. But even if a certain percentage of buyers bail out, the demand will still be there. Whether there are 25 or five serious buyers waiting for the same property is basically "irrelevant", he says.

Two other indicators seem to underline the slight downward price action in July. The Europace House Price Index, which is based on transaction prices, reports for the first time "a downward price trend" for new-build residential housing, while the residential AWI Index from nationwide broker group Aengevelt also lurched downwards after a phase of renewed optimism over the winter.

The Europace Index fell by 0.60% in July over the previous month, including the prices for new-build condominiums. Aengevelt's AWI Index, which appears twice yearly and which assesses prospects across different segments of the residential market, saw its gauge fall across all segments after rising strongly in its winter survey after its all-time low in summer of corona year 2020. Much has changed in the marketplace since then, of course.

Further research on behaviour in the residential market in Q2 comes from McMakler Research, of the eponymous online broker platform McMakler. Their analysis shows that prices on the German real estate market fell in the second quarter for the first time since the real estate boom began. While the market in the first quarter of 2022 still recorded a significant price increase of 2.5% compared to the previous quarter, the deterioration market conditions led to a price decrease of 0.8% in Q2. The increased interest rates also lengthened the buying process by an average of 15% to 96 days compared to the same period last year.

According to McMakler founder and CEO, Felix Jahn: "The market is visibly reacting to the interest rate hikes and the economic environment. While demand is cooling off, more properties are coming onto the market right now. This is the beginning of a new market phase for prospective buyers and sellers. The latest signs offer prospective buyers in particular an exciting environment: Financing interest rates are still at a historically low level and in some markets prices are falling for the first time in a long time.” REFIRE will continue to track the evidence carefully, and we'll publish an update once figures for August and Q3 have been collated.