Residential rents now rising faster than prices as buyers fall away

Residential rents are now rising much faster than prices in Germany's large and medium-sized cities, as thwarted potential buyers re-commit to the rental market, and immigration helps to push up housing demand from below, according to a new study just issued by JLL.

The multi-year trend, of house and apartment prices rising faster than rents, is now reversing, says the study. Over the last five years, residential purchase prices rose by an average of 9.1% annually, as against rents which rose at an annual 3.7% clip.

JLL's Roman Heidrich tells us that high immigration last year helped fuel demand for rental accomodation. "This is largely due to the many war refugees from Ukraine, but international immigration has also generally increased again after the weaker Corona years." The rate of new building is simply too weak to relieve pressure on the rental housing market, he says.

Among cities seeing the highest rent rises were Cologne (up 7%) and Düsseldorf (up 6%). In Stuttgart, by contrast, rents rose by a much more modest 1%, possibly because of the strong fall in purchase prices of nearly 9%, which may have helped cushion the upward pressure on rents.

The picture is not quite so clear-cut outside the larger cities. Outside the Big 8 cities, rental growth was 4.4% in the second half of 2022, while purchase prices rose by 0.6%. In rural areas, advertised purchase prices rose by 6.1%, about the same as the 6.0% in asking rents. This means that despite the overall slowdown, rents in small towns grew faster than the medium-term average, and purchase prices grew more strongly than in the medium-sized and largest cities. A possible other reason for this is that there is no so-called Mietpreisbremse outside the big cities, which regulates how high and how fast rents can rise (generally about 10% on a new lease agreement).

JLL's Heidrich also attributes the rent rises to perceivable population shifts to rural areas over the last three years. Many households with low and medium incomes no longer want or can afford the rents in the big cities and are moving out. The trend is amplified by the number of people now able to work from home in the wake of COVID-19, which is helping to drive up rents and prices. A lack of new building has restricted supply, and is helping push up rents as vacancies fall and demand increases.

Further studies from Frankfurt-based bank Helaba and the think-tank IW Köln would seem to support this evidence of rising rents. IW Köln's Dr. Michael Voigtländer believes it's possible that this is the start of a new trend where rent rises steadily grow faster than purchase prices. His study shows rents rose in Q3 last year by 5.8% year-on-year. That was well above the three-year average of 4.5%.

The IW Köln study is based upon data for 1.5 million rental property advertisements on the biggest internet portals - which of course does not record actual deals done, although as a general rule there is little negotiation on rents.

The largest portal, ImmoScout24, reports that competition for housing has never been fiercer. It cites one Berlin apartment advertised recently which attracted 226 interested parties, within a week. What few new dwellings are coming on to the market - inevitably at the upper end of the rent spectrum - are seeing the results of their landlords being subjected to higher building and financing costs, and passing these on to the tenants. IW Köln's Voigtländer believes that 2023 will see an even greater tightening of housing supply, as potential buyers remain locked out of the investment market, and add further pressure to the upward direction of rents.

REFIRE: Theoretically, at some point the fall in the price of housing will provide compensation for potential buyers having to pay more for their financing and for stumping up more equity. They may then turn their focus again to buying - but we're still a good way from that point yet. Prices can be 'sticky' downwards for a long time. With most owners on 10 to 15-year fixed rate mortgage deals, it's not as if recent buyers are in any rush to sell, while longer-term owners have been sitting pretty over a 12-year period of rising prices. Rents are still headed upwards.