The halt in the downward trend of property values
The Sluggish Recovery of Real Estate Prices in Germany
The downward spiral in real estate prices across Germany appears to be slowing down, according to data from the Association of German Pfandbrief Banks (vdp). In fact, the average cost of houses and apartments increased by a modest 2.1% in the final quarter of 2024 compared to the previous year. Commercial real estate also experienced a slight uptick.
However, vdp CEO Jens Tolckmitt is cautious about the outlook for 2024, stating that a new property price boom is unlikely as interest rates remain high. A significant decrease in interest rates is required to trigger such a boom, Tolckmitt explained.
The vdp's real estate price index reached 178.4 points in the fourth quarter of 2024, a growth of 1.8% compared to the previous year. Tolckmitt characterized this as a stabilization of prices, yet the commercial property market continues to show restraint.
On the other hand, the residential real estate market is thriving, partly due to a widespread housing shortage in Germany. Consequently, rental rates are on the rise as well.
The Odd Omission of Housing Policy
Tolckmitt expressed disbelief at the minor role housing policy is playing in the election campaign, citing it as one of the most pressing political and social issues. He emphasized the need for a new federal government to prioritize housing construction in major cities. Many experts echo this sentiment, lamenting the lack of focus on the housing issue during the election campaign.
The real estate industry was plunged into crisis in recent years due to soaring interest rates, escalating construction costs, and falling property prices. Companies like Vonovia and LEG were forced to write down their portfolios and sell off properties to alleviate their debt loads. The tide has turned once again with declining interest rates from central banks, as noted by Vonovia CEO Rolf Buch.
The Factors Influencing Real Estate Prices in 2024
The prediction of only marginal real estate price increases in 2024 in Germany is being influenced by various factors:
- Uncertainty in Rental Prospects: There remain uncertainties surrounding rental prospects for offices and retail properties, causing fluctuations in demand and pricing in these sectors[1].
- Economic Challenges: The German economy is grappling with structural issues, global uncertainties, and rising protectionism. These factors are negatively impacting the real estate market by decreasing demand and causing financial distress[2][3].
- Company Mood: The poor mood among companies, which can be attributed to economic uncertainty and financial strain, is contributing to the subdued real estate market[1].
- Reduced Yield Advantage: The shrinking yield advantage in real estate investments is currently having a dampening impact on price increases[1].
- Desire for Solid Investments: Despite the challenges, properties with strong potential such as apartment buildings, multifamily housing, and logistics properties remain popular. Additionally, there is increasing interest in data centers, fueled by the growing importance of AI[1].
- Construction Crisis and Insolvencies: The construction crisis and insolvencies within the project developer community are limiting the availability of modern properties, leading to a slight increase in real estate prices[1].
- Vacancy Rates and Conversions: The positive rental prospects for contemporary spaces are tempered by weak demand for outdated properties. Persistently high vacancy rates are being mitigated by renovations and conversions, helping to maintain some stability in the market[1].
These factors, among others, collectively contribute to the expectation of only minimal real estate price increases in 2024, as suggested by the vdp.
Despite the promising recovery in real estate prices, the CEO of the vdp, Jens Tolckmitt, underscores the necessity of a new government prioritizing housing construction in major cities, given the omission of housing policy in the election campaign and its significant role in the economy.
The economic challenges facing Germany, including global uncertainties and rising protectionism, are adversely impacting the real estate market by decreasing demand and causing financial distress, contributing to the overall moderate growth in real estate prices.
