Why property investment in Germany is not attracting buyers at the moment
High demand and steadily rising prices have always characterised the German property market. However, soaring inflation has led to the introduction of tight monetary policy measures. As a result, interest rates have risen to record highs and property investment in Germany has started to decline.
The country recorded its biggest fall in house prices in 13 years in the second quarter of 2023. Analysts cite high-interest rates and a general rise in the cost of building materials and energy as the main factors. Over the year, house prices fell by almost 10% and 1.5% quarterly.
Overview of the property market
The fall in house prices was most noticeable in the major cities. In Munich, Berlin, and Hamburg, for example, the cost of apartments fell by almost 10% and the cost of houses for 1-2 families by 12.6%.
In Germany, interest rates have been at rock-bottom levels for a long time, contributing to an increase in housing investment. People actively took out loans to buy houses and apartments, which helped to push up prices. This continued for about 10 years until Europe and the world faced geopolitical conflicts that led to record inflation and an economic crisis. There has been a decline in investment in the German property market. Many projects are on hold, and some developers have declared bankruptcy.
In July 2023, the number of building permits issued fell by 31.5% compared to 2022. At the same time, the cost of building projects rose by around 9%. According to the Housing Industry Association GdW, the crisis in the construction sector is ongoing. And more recently, it has been hitting the middle-income segment of the population. GdW proposes the following measures to overcome the difficulties:
– government support for property developers;
– reduction of VAT to 7%;
– introduction of a state loan programme with an interest rate of 1%.
On the severity of the crisis, however, not all experts agree. Christoph Straube, representing W&L AG, does not consider the fall in property prices to be critical. The analyst bases his position on the high cost of new buildings in several German cities. According to Straube, prices for high-quality properties in popular locations could rise in the near future.
Rents are another problem for the German market. To regulate their increase, the government is considering some measures, including:
– lowering the rent ceiling for apartments;
– restricting rents in densely populated areas to no more than 6% over 3 years;
– revising local price ceilings in line with supply and demand.
However, such measures could make the German property market less attractive as an investment.