Real estate prices in Germany are plummeting, and lenders are worried

The crisis in the German real estate market is deepening and is beginning to strike fear into the credit system as well. According to data from the Federal Statistical Office, residential property prices in Germany fell dramatically in the third quarter of 2023. From July to September, they fell by an average of 10.2 percent compared with the same period a year earlier. This is the steepest year-on-year decline since the time series began in 2000.

The decline in real estate prices in Germany is thus accelerating. The main reasons for the decline in purchase prices continue to be lower affordability due to rising financing costs, the energy transition, and persistently high inflation. “While almost all homes sold well during the boom phase, properties with negative features in particular are now set to decline,” Thorsten Lange, an analyst at DZ Bank, said this week.

Some experts are confident of price stabilization in 2024 and expect the price correction to end next year, DZ Bank writes in a recently published study. Average annual declines of between 0.5 percent and 2.5 percent are expected. Properties located in distressed or energy-intensive areas are likely to experience weaker trends, Lange said.

The head of the Association of German Banks, Pfandbrief, fears the worst crisis in the sector in 15 years. However, there is no risk of a banking earthquake, at least for now, because banks are acting prudently.

German real estate lenders are considering additional safety provisions in view of the difficult situation in the German market. “We have to assume that some banks will increase their risk provisions again in the near future,” Gero Bergmann, chairman of the Association of German Pfandbrief Banks (VDP), told Handelsblatt. Experience has shown that banks make additional provisions in the fourth quarter, a period when annual financial statements are due. “It is also possible that an increase will occur in the coming year,” Bergmann added.

According to Bergmann, the industry is going through its worst crisis in 15 years. According to the association, the peak is yet to come. “Things will get a little worse before they get better,” Bergmann said. “According to our association, we will see the bottom around the middle of next year.”

The problems with this policy, however, are twofold: on the one hand, higher provisions come to reduce banks’ corporate profits, and this will greatly displease shareholders and cause their stock market value to drop. This event will be especially serious if banks have to recapitalize because they will not find adequate funds at affordable prices. Moreover, the fact that prices will recover in 2024 is a hope that is at odds with the gloomy economic forecasts.

For now, German banks appear protected with respect to the real estate crisis, but what if it continues or deepens?