House prices in Germany have declined for the sixth consecutive quarter, continuing a severe slump initiated last year due to high interest rates and rising costs. According to the statistical office Destatis, the residential property price index fell by 5.7 percent year-on-year in the first quarter, following a revised 7.2 percent decline in the previous three months.
In the third quarter of 2023, house prices plunged by 10.2 percent, marking the worst fall in the current cycle. Sequentially, residential property prices decreased by 1.1 percent in the first quarter.
For the full year 2023, German house prices decreased by 8.4 percent. This represents the sharpest year-on-year decline since the series began in 2000 and the first annual decline since 2007.
Earlier this month, the European Central Bank (ECB) cut interest rates for the first time in five years, with policymakers convinced that inflation is finally returning to the 2 percent target. Economists anticipate further rate cuts from the ECB later this year.
ING economist Carsten Brzeski commented that despite the ECB rate cut, financing conditions remain restrictive, which will continue to dampen housing demand, making a strong market rebound unlikely. "The tense situation in the construction sector and the lack of new housing supply will exert upward pressure on prices while also weighing on volumes," Brzeski said. "Although demand will continue to recover in the coming months, a swift return to levels seen before the ECB's interest rate hike cycle is unlikely. It will be a gradual recovery."
ING projects a growth of about 1 percent in German house prices this year.
A recent survey by the ifo Institute revealed that German builders remained pessimistic about their business situation in May but hold hope for better prospects, believing that the worst of the economic downturn is behind them. According to the ifo Institute, many companies are counteracting order shortages by reducing prices.
The ifo Institute raised its forecast for German economic growth this year to 0.4 percent from 0.2 percent and maintained its prediction for the next year at 1.5 percent. "The German economy is slowly working its way out of the crisis," the ifo said.
