vdp property price index: Price correction in the property market continues

Berlin, May 10, 2023

  • vdp property price index sees prices decline across all property classes

Property prices were down throughout Germany in the first quarter of 2023. This is shown by the property price index of the Association of German Pfandbrief Banks (vdp), which recorded a decline of 3.3% compared with the first quarter of 2022 and 2.3% compared with the previous quarter. These are the heaviest falls both year on year and quarter on quarter since index records began. With that, the trend that started in the second half of 2022 continued in the first quarter of this year. The vdp index, which is conducted each quarter by vdpResearch based on an analysis of actual property transaction data from more than 700 credit institutions, now stands at 184.5 points (base year of 2010 = 100 points).

Residential property prices in Germany dropped by a moderate 2.1% year on year (Q1 2023 compared with Q1 2022). Once again, continued low levels of new construction activity and the strong demand for housing had a stabilising effect. By contrast, commercial property prices saw a considerably steeper decline (-8.3%). Here, retail property prices, down by 10.5%, fell somewhat more than prices for office properties (-7.5%). A quarter-on-quarter comparison (Q1 2023 to Q4 2022) likewise shows negative signs across the board. While residential property prices narrowed by 2.0% in this period, commercial property prices fell by 3.6%, with the latter figure being driven by negative price growth for both office (-5.0%) and retail (-1.7%) properties.

“The price correction is underway in all property classes.” 
Jens Tolckmitt

“The entire property market has been undergoing change since mid-2022. This is reflected, above all, in property prices,” vdp Chief Executive Jens Tolckmitt pointed out. “The many negative factors such as inflation, rising interest rates and uncertainty are fuelling a price correction in all property classes.” However, he went on to explain, the degree of this correction varies. Retail property prices continued to see the strongest decline year on year. Quarter on quarter, however, they dropped by only -1.7%. “This development in retail property prices could be a first sign of prices bottoming out,” Tolckmitt remarked.  

Year-on-year change in prices (Q1 2023 compared with Q1 2022):

Residential/commercial properties overall:-3.3%    
Residential properties in Germany:-2.1%    
Residential properties in the top 7 cities:-1.4%    

Commercial properties: -8.3%
- Office properties:      -7.5%
- Retail properties:     -10.5%

Quarter-on-quarter change in prices (Q1 2023 compared with Q4 2022):

Residential/commercial properties overall: -2.3%    
Residential properties in Germany:               -2.0%       
Residential properties in the top 7 cities:    -1.3%       

Commercial properties: -3.6%
- Office properties:      -5.0%
- Retail properties:      -1.7%

Multi-family houses: continued strong rise in returns and rents

The decline in residential property prices is affecting both owner-occupied housing and multi-family houses. Compared with the opening quarter of 2022, owner-occupied properties became slightly cheaper, by 1.0%, while prices for rental housing properties contracted by 3.1% in the same period. Compared with the previous quarter, meanwhile, prices for owner-occupied residential properties shed 2.4%, while prices for multi-family houses fell by 2.2%. 

Returns on multi-family houses measured by the cap rate index rose substantially both in annual terms (+10.9%) and on a quarterly basis (+3.5%). Rents under new contracts also increased strongly in both periods. Compared with the first quarter of 2022, growth amounted to 7.4%. Compared with the fourth quarter of 2022, it came to 1.2%. “A real housing shortage persists. Demand in the housing market is high and still rising, whereas supply is far too low,” Tolckmitt commented. 

Residential property prices in Berlin still rising slightly year on year

The beginning of this year saw prices for residential properties in the top 7 cities perform similarly to those in the German market as a whole. Prices contracted by 1.4% compared with the first quarter of 2022, and by 1.3% compared with the fourth quarter of 2022. As in the previous quarters, Berlin stood out among Germany’s major cities. Residential properties in the capital grew more expensive to the tune of 1.0% year on year. Compared with the fourth quarter of 2022, however, residential property prices fell in Berlin too (-1.3%). The other six top 7 cities all recorded a drop in residential property prices both year on year and quarter on quarter. The declines were greatest in Frankfurt am Main, with rates of change of -6.4% and -2.2% respectively.  

Possible signs of retail property prices bottoming out

The trend of receding retail property prices that had begun before the outbreak of the COVID-19 pandemic continued in the first quarter of 2023. Compared with the first quarter of 2022, prices were down by 10.5%. Compared with the previous quarter, however, prices fell only slightly, by 1.7%. “Whether this means prices are beginning to bottom out remains to be seen,” Tolckmitt said. But rents under new contracts are also showing first indications of this. Whereas they fell by 5.0% compared with the same quarter of the previous year, they edged up slightly by 0.3% compared with the previous quarter. The cap rate index as a measure of returns on retail properties rose by 6.2% (year on year) and by 2.0% (quarter on quarter).

Returns on office properties grew even more substantially, with the cap rate index advancing by 12.8% compared with the first quarter of 2022 and by 4.3% compared with the last quarter of 2022. By contrast, office and retail properties experienced differences in rent development. While office rents still increased by 4.4% year on year, they slackened by 0.9% quarter on quarter. Office property prices fell by 7.5% (year on year) and by 5.0% (quarter on quarter).

Outlook: still no signs of an abrupt drop in prices

All property classes have one thing in common. “We are still seeing comparatively few transactions. Buyers and sellers continue to seek a new price equilibrium. This phase is likely to last for several quarters to come,” Tolckmitt remarked. He concluded by putting the current price correction into context, explaining that after more than ten years of dynamic price growth, this reversal had been expected for some time. Now it is here. “Just like any other market, the property market is subject to cycles. In the coming quarters we expect prices will continue to fall to varying degrees in the individual property classes. That said, we still see no signs of an abrupt drop in prices.”