The real estate market boom in Germany has come to an end. The country recorded the biggest drop in home prices over the past 20 years.

What is going on in the German real estate market?

Let’s start with the background. The last decade has been quite successful for real estate markets in many European countries, including Germany. Only in the previous seven years have German real estate prices risen by 60%. But everything changed in the summer of 2022, when the European Central Bank began to raise interest rates to cope with record inflation. 

And rates are still rising: in early February 2023, the ECB raised its deposit interest rate by half a percent to 2.5%; next month it plans to raise it again at the same rate, and then the cost of borrowing in the eurozone will rise to its highest level since the financial crisis of 2008.

Such measures lead eurozone countries to tighten lending conditions. And the result is that interest rates rise, mortgage demand falls sharply, housing prices fall, and the cost of renting, on the contrary, rises. 

In numbers, the situation on the real estate market in Germany is as follows: over the past six months, home prices fell by 2.5%, which is more than the last 20 years. The situation on the market is shared by the German Association of Mortgage Banks (VDP), which collects and analyzes data from 700 lending institutions in the country.

How much money must one make to buy an apartment in Germany?

By the way, the trend has not only affected residential real estate: commercial real estate prices have fallen by 5% in the last 6 months. That is, the damage to this market is even more significant.

The outlook, according to economists and bankers, calls for a gradual and moderate decline in German housing prices over the upcoming quarters. And they are confident that the country’s financial system and households will hold, even if house prices in Germany fall by as much as 15%. They assure that it will not cause too much stress because the average mortgage repayment period in Germany is about 14 years. 

Elsewhere in the eurozone, the situation is not easy either: house prices in Sweden fell 13% between their peak a year ago and December; in the UK, house prices fell 5.7% last month compared to their August peak; and in the Netherlands, house prices fell 4.5% in December compared to their peak in July.