Largest Decline in Residential Real Estate Prices in Six Decades

A recent study reveals that German residential real estate prices experienced their most significant drop in 2023, marking the steepest decline in at least 60 years. The Kiel Institute for the World Economy (IfW) reported on Thursday that condominium prices plummeted by 8.9 percent, single-family homes by 11.3 percent, and apartment buildings by 20.1 percent. When adjusted for inflation, measuring in current purchasing power, the decline in value is approximately five percentage points higher.

The IfW highlighted the historical uniqueness of the current downturn, stating, "The speed and extent of the current decline in real estate prices in Germany is historically unique. Never since the appraisal committees began collecting purchase prices in the 1960s have real estate prices fallen so quickly." However, this abrupt decline follows a historically unique price surge that began around 2009, with prices tripling to quadrupling in various segments before the sudden reversal in 2022.

IfW President Moritz Schularick commented on the situation, stating, "In view of the exorbitant price increases for over ten years and a new interest rate environment, a phase of price correction is certainly appropriate and, even to the extent that it has been so far, is not worrisome for the overall economy." In the fourth quarter of 2023, the rate of price decline slowed, with condominium prices dropping by only 0.6 percent and single-family homes by 1.2 percent. Multi-family houses even saw a 4.7 percent increase, though fluctuations were notable due to the low number of transactions.

The study, based on the German Real Estate Index (Greix), a collaborative project involving expert committees for property values, ECONtribute, and the IfW, also provided insights into the heterogeneous development of sales prices in Germany's top 7 metropolises. Cities such as Cologne and Stuttgart experienced significant quarterly declines of 3.6 percent each, while Berlin (-0.4 percent), Frankfurt (-0.2 percent), and Hamburg (+0.2 percent) displayed more lateral movements.

Schularick suggested that real estate prices might be reaching a bottom, but this will become clearer in the upcoming quarters. The behavior of central banks indicates potential interest rate cuts in the foreseeable future, potentially making real estate financing more affordable and stimulating demand.

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