German residential real estate prices rose across all segments for the first time in about two years in the second quarter (2Q), buoyed by the prospect of lower borrowing costs and a lack of new housing.

Prices for apartments and single-family houses in the period ended June 30 gained 2.4% and 2% respectively compared with the previous three months, according to the German Real Estate Index published by the Kiel Institute for the World Economy on Thursday. The increase for multi-family houses reached 4.4%.

Property prices are still down on the same period a year ago, but the drop has narrowed for the third consecutive quarter, the index showed.

“The turnaround in the real estate market has begun,” Kiel Institute researcher Jonas Zdrzalek said in a statement. “The great uncertainty of the past few years and months is clearly subsiding, and the prospect of falling interest rates is stabilising the market.”

He added that a decline in new construction is “tightening supply and thus supporting price momentum”.

The signs of recovery follow an unprecedented slump in Germany last year, when residential real estate prices recorded the sharpest drop in 60 years as high interest rates and material cost inflation scared off prospective buyers. Prices in Europe’s biggest economy have corrected much more strongly than elsewhere in the region since most people rent their homes, meaning consumers have the option to remain tenants rather than take out pricey mortgages.

The European Central Bank started to lower borrowing costs in June and investors expect a further loosening of monetary policy at its next meeting in September after a pause last month.

Activity in Germany’s real estate market still remains muted. While the number of residential property deals in 2Q rose slightly, it was at a low level of around 60% of the average between 2019 and 2021, according to the Kiel Institute. 

  - Bloomberg