Green is the New Location: The Impact of the Green Transition on the German Real Estate Market

Green is the new location

The impact of climate change combined with policy uncertainty is already very much visible in the German real estate market. An analysis of anonymised ING data confirms that the green transition in the housing market has already been a decisive factor for price development in recent years. There is a strong price differential between energy efficient residential properties and their non-renovated counterparts, which has increased significantly between 2021 and 2023.

Enormous efficiency premiums are already being paid and renovation discounts are being demanded. This year, the price of a home with an energy label H was on average 45% lower than that of a residential property with an A+ energy label. Last year, the difference was 36%. Even those with an energy label B are worth 28% less this year, after a 20% discount in 2022.

 

Renovation discount from energy efficiency class A+ per energy efficiency class

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As regulation progresses, the demand for new buildings is likely to see a continued increase, which will lead to elevated prices given the scarce supply and simultaneously high construction costs. Prices for energy efficient new buildings are therefore likely to continue rising over the coming years, while we expect more significant price drops for non-renovated existing buildings. Sellers will now have to accept renovation discounts to compensate for the costs occurring after purchases. As a result, the negative price development for existing properties could be even stronger than the current market environment around high financing costs and real wage losses alone would suggest.

In the past, the rule of thumb when buying a property was based on three criteria: location, location, location. With the green transition, it seems three more are quickly rising to the top of the list: energy efficiency, energy efficiency, energy efficiency.