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vdp property price index: Decline in property prices begins to slow

Berlin, August 10, 2023

vdp index shows quarterly fall of 0.9% in residential property prices

The price correction on the German property market continued in the second quarter of this year, although the downward trend slowed noticeably compared with the previous quarter. The property price index of the Association of German Pfandbrief Banks (vdp) now stands at 182.4 points (base year 2010 = 100 points), representing a drop of 1.1% compared with the first quarter of this year and a fall of 6.4% compared with the second quarter of last year. The vdp index has been compiled by vdpResearch every quarter since 2010 and, unlike other property market indices, is based on an evaluation of actual property transaction data from over 700 credit institutions, providing coverage of the entire German market quarter by quarter.

Residential property prices in Germany fell by 0.9% compared with the immediately preceding quarter (Q2 2023 vs. Q1 2023). Prices for commercial properties declined by 2.0% in the same period, with a slightly larger drop in retail property prices (-2.5%) than in office property prices (-1.9%).

Residential property prices were down by 5.4% compared with the second quarter of 2022 (Q2 2023 vs. Q2 2022), when they reached their highest level to date. Commercial property prices fell by 10.3% year on year. Once again, there was a larger drop in prices for retail properties (-11.7%) than in office property prices (-9.8%).

“A sideways trend is emerging in residential property prices.”
Jens Tolckmitt

“Prices continued to fall on the German property market in the second quarter of this year. However, the downward trend in property prices has slowed markedly, indicating that the market could bottom out in the next few quarters. For residential property prices, at any rate, a sideways trend is already emerging,” said Jens Tolckmitt, Chief Executive of the vdp.

Year-on-year change in prices (Q2 2023 compared with Q2 2022):

Residential/commercial properties overall: -6.4%
Residential properties in Germany: -5.4%
Residential properties in the top 7 cities: -5.0%

Commercial properties: -10.3%
- Office properties: -9.8%
- Retail properties: -11.7%

Quarter-on-quarter change in prices (Q2 2023 compared with Q1 2023):

Residential/commercial properties overall: -1.1%
Residential properties in Germany: -0.9%
Residential properties in the top 7 cities: -1.1%

Commercial properties: -2.0%
- Office properties: -1.9%
- Retail properties: -2.5%

Residential property: accelerated rise in returns for multi-family houses

Prices for both owner-occupied housing and multi-family houses contributed to the slight decline in residential property prices in the second quarter of this year, with changes of -0.4% and -1.4% respectively compared with the first quarter of 2023. Developments in the second quarter thus had only a minor or below-average impact on the annual rates of change (-3.8% for owner-occupied properties and -6.9% for multi-family houses).

“The rise in rents highlights the increasing pressure on the housing market.”
Jens Tolckmitt

Year-on-year growth in returns on multi-family houses accelerated again compared with previous quarters, as measured against the cap rate index (+14.2% compared with +10.9% and +6.0% in the preceding quarters). Rents under new contracts were up +6.2% compared with the prior-year period. “Demand for housing remains consistently high,” Tolckmitt noted. “As buying a property has become less affordable due to the significant rise in interest rates, there is more demand for rented accommodation than in previous years. The rise in rents highlights the increasing pressure on the housing market.”

Düsseldorf experiences small quarterly increase in prices

Average development of residential property prices in the top 7 cities has most recently been similar to Germany as a whole. Prices in major cities fell by 5.0% year on year in the second quarter of 2023 and by 1.1% compared with the previous quarter. However, there are some significant differences between the individual rates of change. Berlin is the city with the smallest year-on-year decline in prices of -3.6%, but at the same time experienced the largest quarterly price drop of -1.5% (together with Hamburg). The biggest annual drops occurred in Frankfurt am Main, Munich and Hamburg (-9.1%, -6.7% and -6.4%, respectively). In a quarterly comparison, the North Rhine-Westphalian state capital Düsseldorf is a positive exception, as the only one of the top 7 cities to record growth – albeit only slight – in prices (+0.1%).

Commercial property: returns higher than financing costs again

The trend that has been ongoing since 2019 on the retail property market, which has also suffered due to structural factors, continued in the second quarter of 2023. Prices for retail properties fell by a further 2.5% compared with the previous quarter and by 11.7% year on year, leading to substantial rises in returns of 9.5% year on year and 3.5% quarter on quarter, as measured against the cap rate index. This was also due to rents under new contracts, which recorded quarterly growth. Although they fell by 3.3% year on year, they were up 0.9% compared with the first quarter of this year. “The retail property market still hasn’t really come back to life, there are still comparatively few transactions. However, prime returns on individual retail properties are evidently higher than financing costs again, so the market is likely to become more attractive to investors again,” said Tolckmitt, pointing to recent statements by consultancies and research companies. “Another positive aspect is that, according to the Federal Statistical Office of Germany, bricks-and-mortar retail is defending its market share against online retail.”

“The search continues for a new price equilibrium on the German property market.”
Jens Tolckmitt

On the office property market, prices fell by 9.8% year on year in the second quarter of 2023 and by 1.9% compared with the previous quarter. At the same time, returns as measured against the cap rate index recorded strong growth of 16.1% compared with the prior-year period, a much more dynamic increase than in the previous quarters (+12.8% and +8.2%). Compared with the immediately preceding quarter there was an increase of 3.2%. Rents under new contracts in the office sector rose again significantly by 4.7% year on year and 1.2% compared with the first quarter of this year. “The developments in returns and rents for offices indicates that the office property market is gradually picking up again. However, there is still considerable uncertainty about further economic development. Moreover, we don’t yet have a complete overview of how the rise in home working is affecting demand for office space. We expect this to continue to have a dampening effect on office property prices in Germany for several more quarters,” said Tolckmitt. “Nevertheless, the German office property market is still much more stable than many other markets in an international comparison, with vacancy rates of about 5.0% at present.”

Outlook: economic development and interest rates will provide positive impetus

In conclusion, Tolckmitt said: “The search continues for a new price equilibrium on the German property market. We expect price adjustments to continue until at least the middle of next year, particularly on the commercial property market. The fact that the German economy isn’t currently experiencing the kind of collapse that some experts predicted could provide positive impetus. Lending rates already appear to be stabilising, which also gives us grounds for optimism. In any case, the exceptionally dynamic growth in interest rates, which was unavoidable after central banks hesitated for too long in tackling inflation, appears to have ended. Once overall conditions become more stable, investors and private individuals are more likely to be willing to engage in transactions again.”