Rebound in German home prices around the corner, analysts say: Reuters poll

4 weeks ago

2 minutes read

2024.08.27 08:19

By Indradip Ghosh

BENGALURU (Reuters) – German home prices will stabilise in the coming months and rise 2% in 2025, supported by interest rate cuts, while rents are expected to increase more quickly, according to analysts polled by Reuters.

The real estate market in Germany, like many of its peers, boomed on ultra-low mortgage rates during the COVID-19 pandemic. But the German market has suffered its worst correction in decades as the European Central Bank raised interest rates at the fastest-ever pace.

Home prices plunged 7.2% last year, the biggest drop since official data were first published in 2000, and fell 1.1% in the first quarter of this year compared with the previous one.

They have declined nearly 14% from a peak in Q2 2022 after surging nearly 25% during the pandemic.

The ECB reduced interest rates in June and is widely expected to cut again next month, leading to a median conclusion from 12 analysts polled Aug. 19-26 that a rebound is around the corner.

Average German home prices, which fell 5.7% in the first quarter, will decline 1.4% this year according to the latest survey, a slight upgrade from a 2.0% drop predicted in May.

House prices are forecast to rise 2.0% and 3.0% in 2025 and 2026, respectively.

Those predictions were largely based on expectations of a further decline in borrowing costs. The ECB will cut its deposit rate twice more this year and four times in 2025, according to a separate Reuters poll of economists.

“Already the first reduction of the ECB policy rate in June and anticipation for more has led to a stop in the decline of mortgage loans and created conditions for a recovery of demand in housing,” said Kholodilin Konstantin at DIW Berlin.

“Stagnating construction coupled with continuing immigration encourages demand increases, paving the way toward rising housing prices in the coming years.”

AFFORDABILITY

Nine of 12 respondents said purchasing affordability for first-time buyers would improve over the coming year.

The prospect of additional government support is also underpinning an expected turn in the market.

German Chancellor Olaf Scholz is scheduled to meet politicians, ministries and industry representatives in December in a bid to tackle the crisis. A similar gathering last year failed to produce any significant concrete action.

Prospects for improved purchasing affordability are not expected to do much to reduce rental cost pressures in Germany’s real estate market, which prior to the stretch of zero interest rate policy was dominated by tenants.

Rents surged over 20% in the second half of 2023, a report from JLL – a global real estate services company – showed earlier this year.

Average urban home rents are expected to outpace home prices over the coming year, rising 4-6%, according to the median view.

“Due to the tense situation in the construction sector, the stagnation of new construction and only gradually-improving affordability of purchasing properties, the situation in the rental market is not expected to ease anytime soon,” said Carsten Brzeski, global head of macro at ING.