Nov 22 2024: German home prices are projected to rise 3% in 2024 and maintain the same growth in 2026, marking a recovery from a prolonged decline, according to a Reuters poll. Analysts attribute the expected rebound to falling borrowing costs as the European Central Bank (ECB) continues its rate-cutting cycle.
Housing Market Stabilization
After a sharp 12% price drop since Q2 2022, triggered by soaring interest rates post-pandemic, the German housing market is showing signs of stabilization:
- Price Recovery: Residential property prices rose 1.3% in Q2 2023, marking the first quarterly increase since 2022.
- Increased Transactions: Real estate transactions also ticked up in the first nine months of 2023, per JLL data.
ECB Policy Impact
The ECB has reduced its deposit rate by 75 basis points this year, with expectations of an additional 100 basis points cut by the end of 2025. Analysts anticipate this will support housing affordability and demand, though mortgage rates remain higher than the ultra-low levels seen in the 2010s.
Forecasts:
- 2023: Housing prices to decline marginally by 0.3%.
- 2024: A rise of 3%, with sustained growth into 2026.
David Muir of Moody’s Analytics noted that while mortgage rate cuts may stabilize the market, the rapid price growth seen in the 2010s is unlikely to return.
Rising Rental Market Pressures
While housing prices are set to recover, rents are expected to outpace home prices in the coming year:
- Urban home rents are predicted to grow by 4%-5% annually.
- Analysts cite stagnant construction activity and record-high rental demand as key drivers of rising rents, particularly in urban areas.
Carsten Brzeski of ING highlighted the structural imbalance between supply and demand, stating that without significant increases in construction, rental prices will remain under upward pressure.
Challenges for First-Time Buyers
Affordability remains a concern:
- Eight out of 13 respondents in the poll believe purchasing affordability for first-time buyers will worsen in 2024, pushing many toward renting.
Broader Implications
The recovery in both residential and commercial real estate indicates improving sentiment in Germany’s property market. However, the affordability crunch and a slow construction sector could hinder the pace of recovery, particularly in urban areas.
For the housing market to achieve long-term stability, policymakers may need to address structural supply-demand mismatches alongside supporting affordability measures.
