Home rents continue to surge, while purchase prices stabilise

As we reported in our January issue, Germany experienced a notable surge in asking rents across major cities over the second half of 2023, registering an average increase of 8.2%, and surpassing the previous year's 6.3%. Berlin led the spike with a remarkable 21.4% year-on-year rise.

The figures were arrived at by JLL by the scrutiny of advertisements in Berlin, Düsseldorf, Frankfurt, Hamburg Cologne, Leipzig, Munich and Stuttgart over the period - a total of 35,000 ads for rental and 41,000 purchase offers. The survey was based on JLL's quality-adjusted analysis, considering property conditions, furnishings, and micro-locations.

Among the key insights were: Berlin's existing apartment segment saw a 31% surge in asking rents, impacting the overall average; and, housing markets in Munich, Stuttgart, and other major cities observed increases ranging from 4.8% to 7.1%.

In view of the supply shortage, the increase in new contract rents is not surprising, according to Dr Sören Gröbel, Director of Living Research JLL Germany. "As a result, the gap between existing and new contract rents continues to widen, which in turn reduces the motivation of tenant households to move to a new property when their circumstances change. This creates a kind of vicious circle: as rents rise more sharply, the number of advertised rental offers shrinks, further exacerbating the tense situation on the housing markets."

Only the construction of new rental apartments could now alleviate the situation. But that's not happening, as construction activity has declined noticeably due to project cancellations, order cancellations and project developer insolvencies and is far from the federal government's original target of 400,000 new flats per year - a goal which has now (thankfully) been abandoned as completely unrealistic.

In addition, the volume of new construction is likely to fall further in the coming years and fall below the 200,000 completed apartment units mark by 2025 at the latest. For the rental housing markets in particular, this means a further intensification of the existing excess demand. "As a result, asking rents will continue to rise," predicts Gröbel.

Cities vs. Suburbs

Despite Berlin's notable rise, it remains the second most expensive city after Munich. Munich's average rent of €22.50/m²/month exceeds Berlin's €19.42/m²/month. Meanwhile, housing markets outside major cities are experiencing less dynamic rental price growth, with increases of 4.8% in independent cities and 5.5% in rural districts. Regulatory interventions may be on the horizon to address growing dissatisfaction.

Purchase prices still falling - but is this a bottom?

Roman Heidrich, lead director for residential valuation at JLL Germany, highlights how low transaction volumes are indicating a still-significant gap between purchase offers and buyer expectations. Higher financing costs due to rising interest rates are yet to be fully reflected in property prices, he says.

Heidrich believes the ratio of rental to purchase costs remains favorable for tenants, likely leading to increased demand in rental housing markets. The imbalance in supply and demand, coupled with improving financing conditions, may contribute to further rental price hikes.

IW Housing Index, a quarterly barometer managed by the researchers at the German Economic Institute (IW Köln), claims in its latest report that "the slump in property prices has come to an end". Purchase prices for residential property, having fallen for six consecutive quarters, are now rising again, they say. In the fourth quarter of 2023, condominiums were already 0.8 per cent more expensive and houses 0.6 per cent more expensive than in the third quarter of 2023.

Energy-efficient housing shows lowest falls

Using the housing index, the IW experts also analysed prices by energy efficiency class and came to the following conclusion: In the highest efficiency class A+, prices have only fallen by 1.1 per cent since the first quarter of 2022 - in class A by a more significant 5.2 per cent.

In the lower classes, on the other hand, the values were close to each other at between eight per cent (class B) and 8.9 per cent (class C) - "presumably because the need for refurbishment is assessed in a similar way", they conclude. Residential properties in energy efficiency classes D to H fell in price by more than ten per cent.

"However, it should not be forgotten that properties with poorer energy efficiency experienced some of the highest price increases in the years up to the first quarter of 2022, with a correction taking place here up to the middle of 2023," says the IW Housing Index.