By Indradip Ghosh

BENGALURU (Reuters) – German home prices will reverse their relentless two-year fall and rise 3% next year and in 2026 on lower borrowing costs, according to analysts polled by Reuters who said rental growth would outpace housing inflation in the coming year.

Once riding high on the wave of low interest rates, the property market in Europe’s largest economy plunged into its worst crisis in decades as a sharp rise in rates after the COVID-19 pandemic tipped developers into insolvency.

Prices have plummeted 12% from a peak in Q2 2022 after surging nearly 25% during the pandemic. But the latest data showed activity in the sector is stabilising.

Residential property prices climbed 1.3% during the April-June period from Q1, the first increase since 2022, while data from JLL recently showed transactions in the sector rose slightly in the first nine months of the year.

The rebound is likely to continue in the next few years as the European Central Bank, which has already cut its deposit rate by 75 basis points this year, is widely expected to deliver at least another 100 basis points of cuts by end-2025.

Average German home prices, which fell 8.5% last year, will decline only 0.3% this year and increase 3.0% next year, according to the latest Reuters survey taken Nov. 12-21.

That was an upgrade from a fall of 1.4% and a rise of 2.0% predicted in August. Prices were forecast to climb another 3.0% in 2026.

“As mortgage rates decline, the German housing market is poised for stabilisation, with both existing and new home prices expected to find support,” said David Muir, senior economist at Moody’s Analytics. 

“However, current interest rates remain elevated compared to the ultra-low levels of the 2010s…This suggests while we may see a moderation in price declines, a return to the rapid appreciation of the past decade is unlikely.”

Like the residential segment, commercial real estate is also showing some signs of recovery with valuations – in decline for two years – rising 0.7% last quarter from the second quarter.

Despite the glimmers of hope emerging from improving conditions and anticipated drops in borrowing costs, concerns around stretched affordability remain.

In response to a separate question, eight of 13 respondents said purchasing affordability for first-time buyers would worsen over the coming year.

That was likely to discourage first-time home buyers to own a home but to instead rent, in a market which is already hot.

Average urban home rents will increase 4%-5% over the coming year, according to the median view. Ten of 13 analysts said rents will outpace home prices in the next 12 months.

“While demand for purchasing properties is only recovering gradually, demand for rental properties remains at a record high. At the same time, construction activity is stagnating, resulting in unmet demand,” said Carsten Brzeski, chief economist at ING.

“Until construction activity picks up significantly, the mismatch between supply and demand, which is even more pronounced in cities than in rural areas, will continue to be a structural price driver in the rental market.”

(Other stories from the Q4 global Reuters housing poll)

(Reporting by Indradip Ghosh; Polling by Purujit Arun; Editing by Ros Russell)

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