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German housing prices drop in Q4 2022, signaling end to boom

March 24, 2023

Inflation and higher interest rates have led to the largest quarterly drop in housing prices in 16 years. At the same time, builders say they have received fewer orders for new housing.

A view of the Berlin skyline with new construction in the foreground
Inflation and interest rate hikes are also damping new construction in GermanyImage: Jens Kalaene/dpa/picture alliance

Germany's Federal Statistics Office (StBA) on Friday announced that housing costs in the country saw their biggest single-quarter drop in 16 years in the final quarter of 2022.

Reasons cited for the surprising turnaround were rising inflation as well as the hike in interest rates undertaken by banks to combat it.

Experts say they expect the trend to continue into 2023.

The announcement was accompanied by data showing that both homes as well as apartments in cities and rural areas fell by an average of 3.6%. The last comparable drop was recorded in the first quarter of 2007, when they dropped 3.8%.

Until the Q4 2022 drop, German housing prices had been on the rise since 2010. 

In a statement, the StBA said the pricing drop could be traced to a corresponding decline in demand as a result of rising finance costs and ongoing inflation.

Overall, prices for single family homes and duplexes in cities fell 5.9% compared to Q4 2021. Prices for apartments fell an average of 1%. Prices for homes in rural areas fell 5.5%.

Prices in Germany's seven most populous cities — Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf — also fell for houses (2.9%) and apartments (1.6%).

Colorful house facades
Germany's Bundesbank says housing prices in cities at the end of 2022 were overvalued by between 20-45%Image: Christoph Hardt/Geisler-Fotopress/picture alliance

Higher interest rates dampen building prospects

Recent interest rate hikes have also soured investor enthusiasm as well as pricing individual investors out of the housing market. Observers say the softening will likely continue into the year, with the German Institute for Economic Research (DIW), for instance, saying a 10% drop in prices may be possible.

According to Germany's Bundesbank, housing prices in cities at the end of 2022 were overvalued by between 20-45%. Therefore, despite the "healthy development" announced Friday, experts say there is little danger of a housing crash.

That has to do with the country's housing shortage where demand far outstrips supply. The lull in new building will help maintain established prices, say experts.

Economist Martin Güth of the Baden-Württemberg State Bank (LBBW) said the Q4 drop "shouldn't surprise anyone, but the pace is an attention getter."

Despite Friday's announcement, overall 2022 housing prices rose 5.3%, this came on the heels of an 11.5% jump in 2021, the largest single-year increase since 2000.

In light of the scarcity of affordable housing and a large influx of migrants — most recently refugees from Ukraine — the German Federal Government had previously announced the goal of building 400,000 new apartments annually. Nevertheless, that goal has remained elusive, with the German Builders' Association (ZDB) estimating only 245,000 units will be completed this year.  

Berliners struggle with soaring rents

js/nm (dpa, Reuters)

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