What will happen to Germany’s Housing market in 2023?

Feb 6 | 5 minutes read
germany market

The well-known saying "What goes up must come down" has been proven true in Germany's real estate market in recent times. For a long time, it seemed like prices would continue to escalate and demand would remain high, but that all changed in 2022. The invasion of Ukraine by Russia and the resulting energy crisis led to inflation reaching new heights, leading the European Central Bank to take action. In an effort to control inflation, the ECB ended their low interest rate policy and surprisingly raised rates to a higher level than expected.

Rising interest rates have made the cost of mortgages more expensive, adding to the financial strain that many people are currently facing. This has led to a predicted drop in the real estate market, according to the Hamburg-based Gewos Institute for Urban, Regional, and Housing Research. The Institute projected a 7% decrease in sales for flats, houses, commercial property, and land, totaling €313.5 billion and fewer than 900,000 purchases. This would mark the first drop in real estate turnover since 2009.

As we look ahead to 2023, it's important for those in the real estate market to consider the potential direction of the trend. While predictions are not always accurate, experts have shared their outlook for the future. Here's what's in store:

Stabilization of interest rates: In the past, obtaining a fixed-rate mortgage with a low interest rate of less than 1% was common, however, that may no longer be the case. The Biallo Construction Money Index saw peak interest rates of over 4% by the end of October, which have since decreased to 3.5%.

Predictions for 2023: As we move forward, it's important to keep in mind the potential shifts in the market and make informed decisions accordingly.

Just as there appears to be some respite from rising interest rates, the Federal Financial Supervisory Authority (BaFin) is preparing to implement new rules that could increase buyer costs.

BaFin will increase the amount of capital that banks must set aside on each real estate loan on April 1, 2023. Banks are currently required to "freeze" 7% of the loan as collateral and are unable to operate with it. This will rise to 9.75 percent next year, with the cost passed on to customers through less favorable mortgage terms.


Apartments in major cities are becoming increasingly unaffordable

Those who want to live in the big city and have their own room (or flat) are finding it more difficult than ever to realize their dreams. Along with high energy and interest rates, a lack of housing in major German cities has resulted in people earning average wages being priced out of the housing market.

After promising to build 400,000 new homes per year, the government significantly undershot this target in 2022, with only 250,000 new homes expected to be completed by the end of December. Experts predict that by 2023, the figure could be as low as 200,000.

All of this means that buyers in every second German metropolis now need a net monthly salary of more than €5,000 to comfortably make payments on a 90-square-metre flat. This is based on the "housing cost ratio," which states that no more than 30% of your monthly salary should be spent on housing.

Using this ideal ratio, Immowelt discovered that significantly higher-than-average earnings are currently required to afford a family home in major cities. For a healthy housing cost ratio in Berlin, for example, after-tax earnings of around €8,000 are required. That figure is €8,200 in Cologne, more than €10,000 in Hamburg, and an astounding €14,000 in Munich.


Prices may fall slightly, but demand will remain high

With so many headwinds facing the housing market, experts predict that prices will stagnate or even fall slightly in some areas. However, according to Debeka, an insurance and housing finance company, the downward pressure on prices varies by region. "In addition, energy efficiency and property condition are becoming increasingly important," a spokesperson explained.

Allianz's Stefan Kohler believes that a number of factors will influence whether buyers will see a sustained drop in prices in 2023. Prices may remain relatively stable if population and rents continue to rise while construction remains low.

Rendsburg, Schleswig-Holstein, is constructing new homes. Slow construction is preventing a precipitous drop in prices.

In most cases, the consensus is that minor price corrections are to be expected, but no one expects anything as dramatic as a housing bubble to burst.

This is because high demand for properties in German cities should collide with a limited supply of available properties. So, while there may be a slight drop in house prices, it may not be noticeable - and any savings will almost certainly be eaten up by higher interest rates.


What long-term trends are there?

So much for 2023, but what about prices in the next ten or fifteen years? Things may be looking up for buyers who have already purchased property in one of Germany's seven metropoles, the so-called commuter belt, or trend cities like Leipzig or Dresden.

Indeed, Postbank's "Wohnatlas" predicts price increases of more than two percent per year (adjusted for inflation) in many of these areas until 2035, with others seeing consistent price increases of one to two percent.


Buyer and seller guidance

It's difficult to predict what will happen to the property market in the long run, but experts believe that prices will fall slightly in many areas, and interest rates will stabilize in the second half of the year.

This may suggest that you wait a little longer before looking for your ideal property, though getting expert advice tailored to your area and needs is always a good idea.

In the coming years, sellers should allow more time to sell their property, according to real estate firm Heinrichs Immobilien. Rather than expecting everything to be completed in 3-4 months, a sale period of 6-9 months is now much more realistic.

Sellers should also get an accurate valuation for their property and plan a sensible marketing strategy with their estate agent, as well as leave plenty of time to find the perfect buyer, according to the firm.


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