Residential Market Report Germany: Energy efficiency is becoming a crucial purchase criterion alongside location

Following the passing of the Building Energy Act by the German federal parliament in mid-September, there is now a new legal clarity: As early as next year, energy efficiency and energy-related refurbishment will become increasingly relevant concerns for property owners depending on the property type, as the legislator’s requirements are set to become ever stricter. The energetic condition of a property will therefore become a key differentiating factor with regard to residential real estate. “Market players are focused above all on energy efficiency, construction activity and the financial sector. The need for advice from experienced and professional market experts is currently higher than ever before,” says Till-Fabian Zalewski, CEO of Engel & Völkers DACH, adding: “Changes in the economic climate have been impacting the market for residential real estate in Germany. While receding prices have recently been observed in several regions, we are moving into a period of stabilization in most cities.” 

This is the eleventh time that Engel & Völkers has published its “Market Report for Residential Property in Germany”, which contains in-depth analysis of the market for freehold apartments and detached and semi-detached houses in 50 selected towns and cities throughout the country.

Prices stabilize in the majority of towns and cities 

“After years of low interest rate policies and rising property prices, market activity has undergone a significant shift since 2022,” Till-Fabian Zalewski reveals. Higher interest rates on mortgage lending and the increased level of inflation led to a reluctance to buy in some price segments, which in turn resulted in price declines in many locations across Germany from the middle of the year onwards. By way of illustration, the average asking price for existing freehold apartments reached an interim peak in the second quarter of 2022 at 4,145 euros per square meter, before then falling by around 5.8 percent to 3,906 euros per square meter by the second quarter of 2023. In the same period, the average asking price for existing detached and semi-detached houses fell slightly by 4.5 percent to 380,000 euros. Approximately 90,000 fewer residential properties were sold in 2022, directly reflecting this reluctance to buy as a result of the new economic conditions. Many prospective buyers initially decided to switch to the rental market. “Generally speaking, the price corrections in Germany were minor and often due to the very sharp price increases of previous years,” says Till-Fabian Zalewski, who continues: “We are now in a period of stabilization in the most popular cities in Germany. The rapid hike in interest rates is now slowing down, causing an increased flatlining of prices.”

In the first half of 2023, Munich remained the frontrunner of the ranking as the most expensive of Germany’s Top 7 cities, with an average asking price of 1.29 million euros for detached and semi-detached houses, followed by Stuttgart at 800,000 euros and Düsseldorf at 797,000 euros. In Frankfurt am Main, detached and semi-detached houses came onto the market for an average of 748,500 euros, while Berlin commanded average prices of approx. 680,000 euros. In Hamburg, the average asking prices for detached and semi-detached houses in the same period were 669,000 euros, with prices in Cologne reaching 629,000 euros.

In the segment for freehold apartments, the highest average asking prices in the first half of 2023 were also found in the Bavarian capital, at 8,976 euros per square meter. Meanwhile in Hamburg, the average price per square meter was 6,263 euros, with 6,262 euros recorded in Frankfurt am Main and 5,846 euros in Berlin. In Düsseldorf, apartments went on the market for an average price of 5,170 euros per square meter; in Stuttgart the average price was 4,978 euros per square meter and in Cologne 4,853 euros per square meter.

The price corrections registered in recent past months were especially noticeable in simple and average locations, whereas prices in good and very good locations were often more stable – due to the fact that buyers in these locations usually preside over a higher share of equity and are less dependent on the development of interest rates for mortgage lending. “In general, the new market climate is currently opening up good entry opportunities for buyers with private equity in many markets that were not previously accessible to them,” Till-Fabian Zalewski states.

Growing demand for advice on energy-efficient refurbishment – market expertise required

Following the most recent decisions by the German government as part of their plan to achieve their set climate targets, energy efficiency is now becoming the most important differentiating factor for residential properties alongside location. High renovation costs and increased energy prices make properties with good energy-efficient standards particularly attractive to buyers. For this reason, houses in the highest energy efficiency classes will continue to be in particularly high demand, and prices will remain steady or even on a rising trajectory in some cases. Properties in need of renovation, on the other hand, are more difficult to sell. “Due to the increasingly strict legislation, this market differentiation is set to come to a head and the need for professional advice – especially for owners of properties with low energy efficiency classes – will continue to increase in the coming years,” says Till-Fabian Zalewski, adding: "Addressing this requires in-depth market expertise from experienced and top-trained real estate consultants."

Outlook: Renewed price rises possible in long term due to lack of construction activity

The short to medium-term development of the residential real estate market is currently not easy to forecast, as it will depend heavily on the future development of inflation rates and interest rates. In prime locations in many towns and cities, Engel & Völkers is expecting prices to rise again in the coming six to twelve months. Nonetheless, stricter lending conditions and high construction costs are also causing construction activity to slow significantly, meaning that a further drop in completion rates can also be expected in the coming years. In the long term, this could then result in a renewed excess demand once again in Germany’s most popular cities, if it transpires that urgently needed new real estate is not being created. Consequently, it is possible that prices will rise once again in the coming years. “Buyers are scrutinizing the quality and location of properties even more closely than in the past. This means that professional advice from experienced market experts will become even more crucial in the future,” says Till-Fabian Zalewski.