The past 12 months has been a rocky time for house prices. The personal finances of many buyers and sellers have come under great strain from rapidly rising interest rates and inflation. Global inflation hit 8.7pc in 2022 dropping to 6.9pc in 2023, according to the World Bank.
At the same time concern about climate change is pushing governments to introduce increasing amounts of regulation in order to improve the energy efficiency of buildings and reduce people’s power usage.
Caught between these two pressures, house prices are being forced downward – and Germany’s property market is a leading example of this dynamic at work.
Prices of houses with low environmental ratings in Germany are falling faster than those with better ratings, because buyers expect net zero regulation will become even tighter. Analysts expect the gap in house prices to continue widening.
Franziska Marie Biehl, economist at Dutch bank ING, said: “Prices for properties with lower energy labels have fallen more significantly than prices for those with a good energy label.
“In our view, prices for old buildings in need of renovation are likely to drop even sharper than the current market environment would already suggest, widening the gap.”
In 2023 the price of a home with an energy label H was on average 45pc lower than that of a residential property with an A+ energy label.
Only 3pc of current German housing stock has been built since 2011 and is therefore likely to need renovation in the coming years, reducing its value.
A survey by estate agent McMakler in 2021 found that 10pc of properties built before 1979 are classified as A, A+ or B. For residential properties built after 2010, the share is more than 70pc.
Refurbishments to improve energy efficiency cost between €400 and €600 per square metre on average, leading many homeowners to opt to sell rather than renovate.
Concerns around regulation are to blame for a fall in buyer demand, says Michael Heming, managing director of Heming Immobilien estate agency.
“People are very worried because they could be paying €300,000 to €400,000 to buy a house, and then have to install heat pumps that they cannot afford.”
Much of the concern is thanks to the Building Energy Act amendments that were passed by parliament in autumn last year. While the legislation has been watered down and has been challenged in court on the basis of procedure, it is going ahead.
Under rules introduced on Jan 1 this year, every new heating system installed in new developments in Germany must now use at least 65pc renewable energy.
For existing buildings, the requirement will come in from January 2026 or 2028, depending on the size of the municipality.
Is the UK also at risk?
The UK could face a similar reckoning. The majority of buildings here are rated D or above, and while Rishi Sunak backtracked on his requirement for buy-to-lets to be C or above by 2028, there is no word yet on what a Labour government would require.
There have been warnings that the requirement for C grade properties could “implode the sector”.
Hamptons estate agents estimates that the total cost to upgrade England’s existing rental stock to band C would be £16bn. This would be equivalent to almost half a year’s rental income.