Why Germany's property boom could be coming to an end

For more than a decade, the property market in Germany has been growing at a dizzying pace. But according to a new report by the Hamburg-based Gewos Institute for Urban, Regional and Housing Research, this period of rapid growth could be coming to an end.

In 2022, sales of flats, houses, commercial property and land are likely to fall by seven percent €313.5 billion and the number of purchases is expected to drop below 900,000.

For its study, Gewos analysed data on finalised property purchase contracts and the associated turnover. 

Based on the data for the first half of the year, a decline in turnover in the German real estate market is expected this year "for the first time since 2009".

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Since May, the number of purchases, sales and especially large transactions have been falling compared to the same period in 2021, explained Sebastian Wunsch, Head of Real Estate Economic Analyses at Gewos.

Last year, turnover in real estate reached a record value of €337 billion, representing an increase of 14.5 per cent compared to the previous year and more than double that of ten years ago.

While the number of purchases fell slightly due to a lack of supply, prices for houses and flats shot up by around 13 percent. These were the strongest increases since records began in the 1980s.

According to Wunsch, this "absolutely exceptional year" was partly down to a rebound in the housing market in the aftermath of the Covid crisis and a huge boom in transactions in Germany's largest cities. 

But conditions on the housing market are making it increasingly difficult for both private buyers and investors to conclude property purchases, he said.

For people looking to buy their own home, the combination of high inflation and rising interest rates means that purchasing power is reduced at a time when mortgages are getting pricier.

Investors, on the other hand, are holding off on purchases due to the uncertainty in the market. This has led to a slowdown in real estate transactions. 

'No drop in house prices'

Despite the decline in purchases, Gewos doesn't believe that house prices are set to drop just yet.

According to the report, the pressure on the German housing market remains high due to strong levels of immigration and the slow pace of construction. 

"There is no sign of an across-the-board price decline, let alone a sudden drop in prices," said Wunsch.

However, Gewos does expect residential property prices to grow at a slower rate, with increases of around three percent this year.

"Regionally and in certain locations and submarkets - such as for unrenovated existing properties - price declines cannot be ruled out either," Wunsch added. 

According to Gewos, the residential property market, which accounts for almost 80 per cent of transactions in this country, is also likely to fare somewhat better than the property market in general.

In 2022, turnover in flats and houses will probably fall by around 5.6 percent to just under €240 billion.

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