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As 2024 draws to a close, the German housing market is exhibiting a striking paradox: falling purchase prices juxtaposed with sharply rising rents. This dynamic lays bare deeply rooted structural issues that are plaguing the market. According to a new study from the German Institute for Economic Research (DIW), property prices have continued to decline for the second consecutive year, while rents have risen sharply. This divergence illustrates deep imbalances in supply and demand, with DIW economist Malte Rieth warning, "The temporary drop in prices cannot hide the fact that the real problem of housing shortages persists."
The decline in purchase prices for single-family homes, condominiums, and building plots—averaging 5% in 2024 compared to the previous year—was largely driven by economic adjustments following a period of inflated valuations. Urban areas bore the brunt of this correction. Major cities experienced price drops of 13%, while single-family homes in mid-tier locations fell by as much as 16%. Despite this correction, properties remain far more expensive than a decade ago. Condominiums, for instance, are now 117% pricier than in 2010.
Signs of turnaround emerging
Still, as we've been reporting in REFIRE, signs of a turnaround ARE emerging. "Purchase prices have started to rise again since the middle of the year," notes study author Konstantin Kholodilin, attributing this shift to falling interest rates and sustained demand from a growing population.
Rents, by contrast, have continued their relentless climb. DIW reports a 4% rise in rents during 2024 alone, pushing the cumulative increase since 2010 to an extraordinary 64%, a figure that starkly contrasts with trends in many other European markets. This trend is particularly acute in urban areas, where vacancy rates remain critically low, averaging 2.5% nationally and dropping to just 1% in Berlin. Such figures underscore the acute strain on tenants, with Michaela Engelmeier of the German Social Association describing the situation as "an unbearable poverty trap for more and more people."
The housing shortage is exacerbated by stagnating construction activity. Building permits plummeted by nearly 20% in 2024, with only 175,800 approvals issued between January and October. This figure is alarmingly short of the federal government’s annual target of 400,000 new homes. High construction costs and reduced lending volumes, still over 40% lower than in March 2021, have paralysed the sector. "Residential construction remains at a level of around 300,000 apartments per year, which is far below demand," emphasises Rieth.
Deflating of speculative bubble
Transitioning to policy responses, recent government measures have included rent caps and extending the rent brake until 2029, but political gridlock ahead of February’s Bundestag election casts doubt on their implementation.
The temporary cooling in purchase prices has offered some relief, deflating what DIW describes as a speculative bubble. Yet risks of a resurgence loom. "The speculative price bubble has lost air," Kholodilin observes, "but the first signs are already pointing to rising prices again, so there is no let-up in sight."
With construction forecasts for 2024 showing little improvement and vacancy rates at historic lows, the housing market’s underlying challenges persist. As prices begin to recover, the DIW study emphasises the critical need for decisive action to address the supply-demand imbalance and prevent the speculative bubble from re-inflating.
