The correction in the German housing market continued in the first quarter of 2024. Despite signs of a tentative recovery at the start of the year, the just-released official data for the first quarter shows that house prices have dropped once again
According to the German Statistical Office’s just-released house price index, German house prices fell by 1.1% quarter-on-quarter in the first quarter of 2024. The bottoming out of the German housing market has thus proved to be lengthier than expected. House prices are now some 14% below their peak.
Looking ahead, the price correction in the German housing market should be followed by a tentative recovery. Unfortunately, however, just as for the German economy as a whole, we do not expect a powerful upswing. The housing market is like a mirror of the German economy, which means that, despite some cyclical improvements, the market continues to be impacted by more structural headwinds.
At the beginning of the year, mortgage interest rates had fallen by some 40bp as a result of financial market participants' expectations that the European Central Bank would cut its policy rate this year almost as aggressively as it had raised them in 2022 and 2023. At the same time, house prices were at their lowest level in around three years and real wage growth accelerated to 3.8% YoY in the first quarter of 2024, the strongest pace since the beginning of the time series in 2008.
As a result, purchasing affordability improved slightly in the first quarter of this year. Although this improvement came from extremely low levels and affordability was still some 25% below its 2011 level in March, demand for housing loans increased by some 11% YoY in the first quarter of 2024.
In the first month of the second quarter, new lending growth accelerated further to 29% compared to April last year, illustrating the positive momentum in the market. Nevertheless, the volume of new mortgage business is still 35% lower than in April 2022.
Looking ahead, mortgage rates are expected to hover around their current levels until the end of the year. Any significant downside shift would require the ECB to cut interest rates much more than markets are currently pricing in.
With the situation in the residential construction sector remaining tight, the lack of housing supply, and in particular affordable housing, remains pressing. Driven by the rise in construction costs and the shortage of workers in the sector, prices for newly completed buildings are expected to remain elevated. In addition, the costs of renovating energy-inefficient buildings are high and any initial purchase price reductions for energy-inefficient houses will not necessarily be able to compensate for these high costs.
