Residential rents soar as German housing crisis ‘comes to a head’

Rents in major German cities continue to soar as rising interest rates sees would-be buyers shun property purchases.

By June, rents had rocketed by 14% y-on-y in Berlin and by 16% in Munich, according to ImmoScout24. According to an analysis by JLL this summer, asking rents in the eight major cities of Berlin, Düsseldorf, Frankfurt, Hamburg, Cologne, Leipzig, Munich and Stuttgart rose on average by 6.7% y-o-y in the first half of 2023, compared to 3.7% in the first half of 2022.

However, within those cities, some rental growth has been even more dramatic: in parts of Berlin, asking rents have risen by 16.7% y-o-y, whereas Leipzig saw some rents rise by 11.1%.

‘In all the metropolitan areas considered, there is an enormous shortage of supply, which will be exacerbated by faltering residential construction,’ warned Roman Heidrich, lead director Residential Valuation & Transaction Advisory JLL Germany. ‘The German government's target of completing 400,000 housing units per year is not feasible in the next few years. The significant drop in the number of building permits suggests that new construction will fall short of demand for some time to come. An end to rent increases is therefore not in sight,’ he added.

As the European Central Bank raises rates in a bid to combat inflation, higher lending costs are squeezing would-be buyers in a market where supply is already tight and the government continues to miss its target of building 400,000 new homes a year. Subsequently, purchase prices have fallen dramatically by 7% by the middle of this year, compared to an increase of 7.5% last year, according to JLL. However, some cities are being hit harder – prices in Cologne have fallen by 8.7% in the past year, or by 10.4% since the third quarter of 2022, according to ImmoScout24.

‘The property market reports of the expert committees, for which real purchase cases are evaluated, show in some cases significantly higher price reductions,’ said Sebastian Grimm, EMEA Head of Multifamily Valuation at JLL. ‘This is a clear sign that there is still a gap between sellers' and potential buyers' asking prices.’

Munich rents are the most expensive in the country at around €22.25 per sqm on average for new rental contracts, although top rents have hit €32.25 per sqm this year, according to JLL. Asking rents in Berlin have also soared to as much as €30 per sqm, an increase y-on-y of 19.3%, meaning that prime rents have effectively risen by 50% in the past five years.

‘The German housing crisis is coming to a head’

‘The German housing crisis is coming to a head,’ said Gesa Crockford, managing director of ImmoScout24. ‘The run on rental apartments in the stock continues to increase and impressively reflects the great shortage of affordable housing - especially in the metropolises.’

In Cologne and Munich, rental inquiries for existing apartments increased by 15% each compared to the second quarter, and in Düsseldorf by 12%, according to ImmoScout24.

Away from the metropolises, price momentum is less pronounced, with asking rents rising by around 2.7% between the summer of 2022 and 2023. At 4.9%, the increase in the counties is slightly higher. As a result, rental apartments in metropolitan areas are almost 50% percent more expensive than in independent cities (by €10 per sqm) at an average of €15.38 per sqm, and around 79% more expensive than in rural districts (€8.61 per sqm).

That’s not to say that rental growth hasn’t been sharp in some smaller cities. Last year, rents in Delmenhorst in Lower Saxony soared by 13.2%, followed by Worms in Rhineland-Palatinate (12.2%) and Weiden in the Upper Palatinate in Bavaria (11.7%), according to the Ministry of Construction.

Rising demand for homes to rent against a backdrop of rising interest rates, falling supply and the inadequate number of rental housing projects under development are all exacerbating the problem. One of the rare exceptions is the Schönhof district in Frankfurt, the largest housing project in Hesse. Last month, the foundation stone was laid there for 288 apartments on two construction sites. According to the developer, the state-owned Nassauische Heimstätte/Wohnstadt (NHW) group, the project has only been viable due to subsidies received from a program that has since been discontinued. With them, rents would be significantly higher than the €14.95 per sqm rent for the 155 non-price-linked apartments.

‘The rent madness is spreading further and further, reaching smaller towns and rural areas’

Nonetheless, many politicians and those in the real estate industry are concerned that rising rents are quickly becoming untenable: ‘It is alarming that rents are now rising where they were previously still affordable,’ said Left Member of the Bundestag Caren Lay, the Left Party's housing policy spokeswoman, last month. ‘The rent madness is spreading further and further, reaching smaller towns and rural areas.’ Ahead of last month’s housing summit, she called for countermeasures. ‘The federal government must now prevent further rent increases with a rent freeze.’

Worryingly, the problem looks likely to get worse. Earlier this month, LEG’s CEO Lars von Lackum warned of rising rents: ‘Rents will rise significantly’, he said in an interview with financial news agency dpa-AFX. In the past three years, he said, material costs alone have risen by 30%. LEG rents out around 167,000 apartments in Germany, mainly in North Rhine-Westphalia but also in other German states.

However, residential landlords in Germany can only raise rents within certain limits in many cities because of government regulations – for example, they are not permitted to increase them by more than 20% within three years and in cities with a stricter cap or rental brake cap, this figure is often 15%. If there is a rent brake, the rent is not permitted to be above 10% above the local comparative rent when a lease is signed.

‘The Federal Government must finally find suitable answers to the housing crisis. In any case, a further ceiling on rents is not a solution,’ warned Dr. Andreas Mattner, chairman of the Central Real Estate Committee (ZIS),commenting on the SPD parliamentary group's deliberations. ‘Any regulation, any capping will only lead to the fact that no dwelling is built  anymore. Like everyone, we are struggling with inflation and increased costs to maintain properties. We need 700,000 new housing units and programs consisting of a reduction in the tax burden, KfW loans, a waiver of taxes - and also the degressive AfA demanded by SPD Federal Building Minister Klara Geywitz.’