Real estate prices in Germany are rebounding after a historic decline, with interest rates also decreasing. Despite ongoing affordability challenges, especially in urban areas, buyers can find attractive prices below previous peaks. The European Central Bank’s recent interest rate cuts have made financing more accessible, potentially saving buyers significant amounts. However, the construction of new housing units remains a pressing issue, prompting calls for government action to stimulate the market further.
Real estate prices have seen a remarkable turnaround – after a historic drop, they are now on the rise once more. Meanwhile, interest rates are experiencing a decline. What implications does this hold for buyers and sellers as we enter the new year?
The aspiration of owning a detached house with a garden and garage, ideally situated near work, daycare, or school, continues to be a cherished dream for many in Germany. However, this dream was largely unattainable for quite some time. This situation was evident in the real estate market, where after years of escalating prices, a significant decline occurred in 2023, as fewer individuals could afford the steep purchase costs. In fact, residential property prices experienced their largest drop in 60 years, marking a historic shift.
Yet, this downward trend appears to have stabilized, with prices beginning to climb again. Real estate expert Michael Voigtländer from the Institute of the German Economy (IW) notes, ‘This resurgence is linked to improved conditions, including a slight decrease in interest rates and a notable uptick in rental prices, which are currently outpacing even the heights seen during previous boom years. This trend is likely to persist.’
Additionally, the government is providing numerous funding opportunities to help upgrade older homes energetically.
Attractive Entry Prices for Buyers
When it comes to purchasing real estate, location remains the key factor. The disparities in pricing are substantial: for instance, a detached single-family home of about 120 square meters with a garage in a moderately good neighborhood in Munich could cost around 1.6 million euros, as per calculations by the building savings bank LBS. In contrast, similar properties in Mainz are still priced at approximately 750,000 euros, while in Magdeburg, they can be found for around 300,000 euros.
However, Jörg Utecht, CEO of the credit intermediary Interhyp, emphasizes that the prices have not yet returned to pre-crisis levels. According to Utecht, the overall price level in Germany still sits about five percent below the peak values, indicating that attractive purchase prices are indeed available for eager buyers.
Declining Loan Interest Rates
The dynamics of the real estate market are significantly influenced by the European Central Bank’s (ECB) monetary policy. Over the course of 2024, the ECB has reduced interest rates four times, with the latest adjustment bringing it down to three percent. This trend is reflected in the credit market as well.
By the end of 2024, the average interest rate on a ten-year loan ranges between three and three and a half percent, a notable decrease from the previous year’s peak of over four percent. This shift is crucial for homebuyers, according to Jörg Utecht, who points out, ‘This change can save customers several hundred euros per month, translating to thousands of euros in savings over the year compared to 2023.’
Moreover, rents are escalating at a faster pace than purchase prices across the country.
Challenges in New Construction
These developments are causing the real estate market to gain momentum once more. However, it also highlights the ongoing affordability crisis for many German households, particularly in urban areas. A significant concern remains that this momentum is not evenly distributed across all segments of the market.
The new construction sector is particularly facing challenges. The target of constructing 400,000 new residential units annually has not been met by the current government. Both Jörg Utecht from Interhyp and IW expert Michael Voigtländer are advocating for renewed initiatives from the incoming federal government, such as eliminating property transfer taxes or significantly boosting funding for new construction projects.
Voigtländer also mentions that many potential buyers struggle with insufficient equity, highlighting the urgent need for additional incentives to stimulate housing construction: ‘It is essential that we see an increase in housing construction activity,’ he asserts.
For homeowners seeking a new living arrangement, exchanging their current property can be a viable alternative.
The Timing Dilemma
So, what should prospective buyers consider in this scenario? Should they act now or hold off? Michael Voigtländer advises against relying on perfect timing. While it might be tempting to wait for the ideal moment, he notes, ‘It’s akin to the stock market; hitting the perfect timing is elusive. It’s more important to select a property you plan to live in or rent out for the long haul. If you can secure financing, then it’s wise to proceed.’
Current trends suggest that in a climate of rising rents and declining interest rates, real estate prices might see further increases by 2025. The demand for housing remains robust; however, many potential buyers find themselves limited by financial constraints.
This discussion was featured by Deutschlandfunk in the program ‘Informationen am Mittag’ on December 30, 2024, at 12:35 PM.