New research from technology and real estate company Prea suggests that price corrections in the German housing market are set to continue for the foreseeable future.
'Our study shows that current hopes for a reversal in the trend of residential property prices are premature,' said Gabriel Khodzitski, CEO and founder of Prea.
'Institutional investors and private buyers would be better off waiting if in doubt, as scientific analysis still confirms significant downward potential.'
For the study, analysts examined real estate market cycles in 24 countries from 1975 to 2024 and applied the data to the current situation in the German residential property market.
Martin Kern, senior market analyst for real estate and energy at the Prea Group added: 'Although prices for residential properties in Germany have already fallen by 21 percent between the first quarter of 2022 and the third quarter of 2023, the bottom has not yet been reached. The saying 'Survive until 25' is likely to become a reality for many market participants.'
Factors backing thesis
The PREA analysis confirms that there is a positive correlation between the duration and dynamics of upswings and downturns. Therefore, the current downturn in the German residential property market is still seen as too short and too mild.
Secondly, the opportunity costs for real estate investment have drastically increased with the turn in interest rates. While real estate as an investment was almost without competition for more than a decade, the residential property market is now competing again with other forms of investment such as stocks and government bonds. This is also why interest in residential properties is expected to be lower in the coming months than in previous years – and prices are expected to fall accordingly.
However, demand for residential properties will not only remain low among investors in the coming months but also among private households looking for a home. For many, homeownership remains unaffordable despite the recent price corrections.
According to the "German Real Estate Index" (Greix), all major cities are currently experiencing falling prices. However, a significant portion of the price correction is due to the recent high inflation, which has weakened purchasing power: a euro today is worth significantly less than at the beginning of 2022.
According to Prea, this means that even upper-middle-class households with a monthly income of 5,000 euros or more can only afford a larger existing apartment in the top-7 cities if they spend up to 50% of their monthly net household income on financing. 'Newly built apartments are also unaffordable for this group,' added Kern. 'As long as even high earners cannot afford property, demand will remain low and prices will have to adjust.'
Furthermore, the supply in the German residential real estate market is likely to increase soon, with a slate of refinancings expected for 2025, many of which may prompt sales.
Concluded Kern: 'We expect that residential property prices will continue to fall at a high rate until the fourth quarter of 2024. In the scenario we anticipate, prices will fall back to the level of early 2017 by the end of this year.'
However, in many major cities, especially the top seven, the decline in prices may be less severe. A significant reason is the sharp increase in rents in recent years.
'Renting is financially sensible only as long as the rental payments are lower than the interest expenses,' said Kern. 'Should rental prices continue to rise to a similar extent as recently, this could again have a positive impact on the demand for home ownership – and thus also on purchase prices.'
