The recession in Germany’s urban residential real estate sector, which caused rare discounts, is coming to an end. The reason for this turnaround is a growing housing shortage in key cities as Germany’s growth momentum catches up with the rest of Europe, Bloomberg reports.
Just a 30-minute walk along the Rhine River from the world-famous Cologne Cathedral, homes with oak floors, spacious patios and spa-like bathrooms were until recently selling at discounts that could reach €57,000 ($62,000).
Anett Barsch, head of project development at Swiss Life Asset Managers’ German division, said the deal offered by the developer of the 300-apartment Viva Agrippina project was meant to stimulate demand after potential buyers were left in “shock” when the European Central Bank raised interest rates in 2022, causing mortgage costs to soar.
Unfortunately, those who missed out on this rise are now out of luck. The recession in Germany’s urban residential real estate sector, which was the reason for the rare discounts, is coming to an end. The reason for this turnaround is a growing housing shortage in key cities as Germany’s growth momentum catches up with the rest of Europe.
Four-month price increase
Prices in Cologne have risen for four straight months, with home prices up 4 percent in June from a year earlier, according to a Bloomberg analysis of data from online real estate platform Immowelt. Other German cities are also ending two years of declines.
Munich, historically Germany’s most expensive real estate market, saw prices rise in June for the first time since August 2022. Annual price changes in 8 of 14 major cities turned positive, and in Frankfurt, Germany’s financial center, prices are close to breakeven after falling more than 16% in a year in August 2023, according to Immowelt data. Silke Peschmann, the sales director for real estate brokerage Engel & Völkers in Cologne, said:
Buyers are now more secure in what they can afford and demand for all kinds of residential properties has risen significantly.
Prices in Germany have corrected much more strongly than in other European countries because most people rent, which means buyers have the option to remain renters rather than take out expensive mortgages.
In most other major European cities, there is less of that option because the housing shortage is forcing buyers to come to terms more quickly with higher financing rates. Eight of the 12 cities posted gains in the latest month, according to Bloomberg City Tracker data. Berlin and Frankfurt are among the few fallers, while Paris is the biggest repeat offender, with home prices in the French capital down 7.2% in June from a year earlier.
New era in European real estate
The price rise in Germany is part of a new era in European residential real estate. In the era of cheap money, prices were partly driven by investors looking to capitalize on debt, but the current market is driven more by supply and demand fundamentals, and this dynamic is forcing prices up.
More expensive financing has also hit builders, exacerbating the housing situation. The Ifo Institute expects just 175,000 homes to be built in 2025, almost a third fewer than in 2023 and less than half the target set by Chancellor Olaf Scholz’s administration. New builds tend to be more expensive than existing homes, so the reduction in construction is having an outsized impact on market levels.
According to Martin Güth, senior economist at Landesbank Baden-Wuerttemberg, people who want to live in their own home are returning to the market in greater numbers when there is a shortage of supply. This means that price growth is likely to be more sustainable. He said:
Sharp price rises, such as we have seen in the past decade, are likely to remain history for the time being. Purely looking at yields, residential real estate is still not really attractive.
Drop in demand has been a difficult challenge
For property developers, the sudden drop in demand has been a difficult adjustment. With hundreds of properties for sale – from compact one-bedroom apartments for €430,000 to family-friendly four-bedroom apartments for €880,000 – Swiss Life AM began offering in January to pay a property transfer tax of up to 6.5% of the purchase price. The advantage of this benefit is that it is not included in the calculation of the cost per square meter and does not affect the cost of the loan.
“We wanted to draw in clients who had the funds available, but wanted to wait for the perfect time to buy,” Barsch said. The move paid off and the developer has sold almost all of the units in Viva Agrippina, which is scheduled to be completed in mid-2025.
Despite a rebound in demand in Cologne’s upscale neighborhoods near restaurants, parks and the city’s zoo, the revival is still limited to Germany’s thriving urban centers. Less sought-after neighborhoods – and the developers who have invested in them – are still struggling, and this could lead to a double-edged housing market as population trends diverge.
Affordable housing construction
While Germany’s largest metropolitan areas could grow as much 20% by 2040, the population in much of the rest of the country will decline and demand for new housing will shrink subsequently, according to Jochen Möbert, an economist for Deutsche Bank AG. Going forward, “prices for residential real estate will diverge accordingly,” he said.
The risk that the gap between the haves and have-nots will widen. In an attempt to narrow this gap, the German government has committed more than 18 billion euros by 2027 to stimulate the construction of affordable housing. Scholz said at a building industry event in June:
We need new construction on a large scale.
The announcement has had little impact so far. Large German landlords such as Vonovia SE have canceled new construction projects indefinitely, citing increased costs and regulatory restrictions. Several small debt-laden developers have already closed under the weight of increased financing costs.
But for companies with money and patience, residential developments that focus on residents rather than investors are still attractive. Swiss Life AM’s Barsch said:
Selling apartments in good locations to owner occupiers makes the most economic sense right now.
