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House prices fell significantly in 2023; more pressure on rents

House prices in Germany fell significantly in 2023, according to the Bundesbank’s current Monthly Report. According to data from the Association of German Pfandbrief Banks (vdp), the prices of owner-occupied housing in Germany fell by 4.1% in 2023, compared with a 9% increase in 2022. The drop in house prices was somewhat stronger (5%) in the seven major cities – Berlin, Cologne, Düsseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart. As was the case with the previous upswing in prices, this shows that the prices of residential real estate tend to change more quickly in urban than in rural areas, the economists write.

Continued growth in rental prices

House purchases were no longer affordable for many people owing to high inflation and increased interest rates from the second half of 2022. Demand for housing declined, increasingly shifting to the rental market. Many potential buyers were probably forced to rent rather than buy, at least for the time being, the economists point out. The already high inflation in rents saw a significant further acceleration. According to vdp, rents for new lettings in multi-family dwellings rose by 6.3%, and by almost 7% in the seven major cities (calculations based on data from bulwiengesa AG).

Rising costs and shortages constraining supply

In addition, the housing supply grew even more slowly in 2023, according to the Monthly Report. This was due to rising costs for construction materials, ongoing supply bottlenecks and shortages of building materials. Wage costs in the construction sector also increased and tighter financing conditions put an additional strain on supply growth. All of this worked to prevent stronger price declines.

Overall, overvaluations in the real estate market declined significantly in 2023, especially in the seven major cities. However, they were not completely eliminated, which is why the economists point out that there remains a certain risk of price corrections.