WIESBADEN (dpa-AFX) - The rise in interest rates and high inflation have put an abrupt end to the long real estate boom in Germany. In the final quarter of 2022, apartments and detached and semi-detached houses fell in price by the most in 16 years, as reported by the Federal Statistical Office in Wiesbaden on Friday. Experts expect the price decline to continue this year.

According to the Federal Office in the fourth quarter, residential real estate fell in price by an average of 3.6 percent compared to the same quarter of the previous year. It was the first year-on-year price decline since the end of 2010. Prices last fell more sharply in the first quarter of 2007, with minus 3.8 percent measured against the first quarter of 2006, the statisticians wrote. "The key factor in the decline in purchase prices is likely to be lower demand as a result of increased financing costs and persistently high inflation." Compared with the third quarter of 2022, the year-end price decline was even more pronounced at minus 5.0 percent - more than experts had expected.

Both urban and rural areas saw price declines for the most part in the final quarter of 2022. The price of detached and semi-detached houses fell more sharply than that of owner-occupied apartments. Prices for detached and semi-detached houses in large cities without counties fell by 5.9 percent year-on-year, while prices for condominiums fell by 1.0 percent. In sparsely populated rural counties, houses were 5.5 percent cheaper, while condominiums were slightly more expensive.

Even in the sought-after seven metropolitan areas - Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf - prices fell on average: 2.9 percent less had to be paid for detached and semi-detached houses, and 1.6 percent less for apartments than a year ago.

The figures clearly show the turnaround in the housing market after the long real estate boom had driven prices ever higher since 2010. In 2022 as a whole, residential real estate still became 5.3 percent more expensive than in the previous year due to the increases in the first three quarters. In 2021, however, the increase was more than twice as high at 11.5 percent.

The reason for the end of the boom is the key interest rate increases by the major central banks in the fight against high inflation, which are also having an impact on construction interest rates. For example, interest rates for loans with ten-year fixed interest rates have quadrupled from just under one percent to almost four percent within a good year. This means that the monthly installments for interest and repayment are hundreds of euros higher than before. For many people, buying real estate is therefore no longer affordable. In any case, money is tight for many people because of inflation, and banks are scrutinizing financing more critically. Agents report far fewer inquiries for real estate than before.

The rise in interest rates has also led to a slump in construction financing business. According to the Bundesbank, new business including renewals in January was 12.7 billion euros - almost half less than in the same month last year. "Among capital investors, interest in real estate investments has fallen, and among owner-occupiers, financial feasibility," Michael Neumann, head at loan broker Dr. Klein, said recently.

According to experts, the trend of falling real estate prices is likely to continue. The German Institute for Economic Research considers a decline of up to ten percent possible this year, the DZ Bank expects discounts of four to six percent. It is undisputed that the real estate market has recently been overheated. At the end of 2022, real estate prices in cities were 20 to 45 percent above the justified level, as calculated by the Bundesbank.

However, experts doubt that Germany is on the verge of a real estate bubble bursting. The housing market is considered robust, even in economic crises, because real estate is often financed conservatively and on a long-term basis. Even if prices were to fall by a total of 15 percent over a longer period of time, the market would still be at the level it was at the beginning of 2020, Jens Tolckmitt, Chief Executive Officer at the Association of German Pfandbrief Banks (vdp), said recently.

At the same time, immigration to Germany was also at record levels in the wake of the Ukraine war. The demand for housing should therefore continue to increase, explained Michael Voigtländer, real estate expert at the Institut der Deutschen Wirtschaft (IW). "Price declines will remain moderate," he expects.

In addition, apartments will remain in short supply, as low interest rates and expensive materials are causing problems for the construction industry. In January, new orders in the main construction sector slumped further, with weak new construction in particular weighing on the sector. This is likely to support real estate prices.

The German government has scrapped its target of 400,000 new homes per year. The ZDB construction association expects 280,000 completed homes in 2022 and a drop to 245,000 this year. For months, the Ifo Institute has been observing a wave of cancellations in residential construction. In February, a good 14 percent of construction companies were affected by cancellations. The Ifo researchers wrote: "Fear is sweeping the residential construction sector."/als/DP/stw