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German residential rents are rising sharply not only in metropolitan regions but also in smaller towns and rural areas. According to the latest IW Housing Index published by the German Economic Institute (IW), advertised new contract rents have increased by an average of 5.3% across Germany over the past year. This increase is more than double the rise seen in 2019.
The IW Housing Index highlights that while the largest cities and their surrounding areas have seen substantial rent increases, the trend extends to rural areas as well. In "other districts" – those that are not major cities or directly adjacent to one – rents rose by 4.6% compared to the same quarter last year. This increase is only slightly less than the 5.1% rise seen in districts adjacent to the "top 7" cities (Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich, and Stuttgart).
Rents rising fastest in Berlin
In the "top 7" cities, advertised new contract rents rose by 3% in the first quarter of 2024 compared to the fourth quarter of 2023. The strongest momentum was observed in Berlin, with an increase of 6% over the previous quarter, which is more than twice the average increase in the ten largest German cities.
The steady rise in rents has prompted political responses. The SPD in the Bundestag is advocating for tightening the rent freeze, which currently does not apply to new builds and furnished flats first used or rented out after 1 October 2014. Dirk Wiese, deputy leader of the SPD parliamentary group, has suggested extending this exemption to 2024, with necessary confidence protection regulations for existing tenancy agreements.
The rent freeze extension until 2029 was agreed upon by the traffic light coalition in mid-April 2024. The proposed extension aims to curb the sharp rise in rents and provide relief to tenants across Germany.
Rising rents helping to stabilise purchase prices
While rents continue to rise, purchase prices for residential property have remained stable. The IW Housing Index reports unchanged values for condominiums and a marginal price decline of 0.1% for houses in the first quarter of 2024 compared to the previous quarter. Year-on-year, prices fell by 3.6% for flats and 4% for houses.
In more rural areas, there was a minimal upward trend in advertised purchase prices of 0.6% compared to the previous quarter. Despite the overall stability in purchase prices, the rising rents are stabilizing prices as they increase returns on new leases. This dynamic suggests a balanced market where investors anticipate better conditions ahead.
Rental yields also growing in smaller towns
The benefits of looking beyond just Germany's biggest cities is further underlined by a new analysis from Germany's leading portal ImmoScout24. The website's analysis reveals that in Germany's major cities, the average rental yield — the ratio of purchase price to annual rental income — ranges between 2.8% and 4% for both existing and new-build flats.
The data, which focuses on three-room flats with 80 square meters, shows Cologne leading with a 4% yield for existing flats. These flats are typically offered for rent at €13,039 per year or for sale at €327,442. In Berlin, new-build flats offer the highest yield at 3.6%, with average sale prices at €510,825 and annual rents at €18,592. Düsseldorf has the lowest yield among the metropolises for new-build flats at 2.8%, with average prices of €525,119 and annual rents of €14,600. Munich shows consistent yields of 2.9% for both new-build and existing properties, while Leipzig's yields are 2.8% for new builds and 3.4% for existing flats.
Higher average rental yields can be found outside the major cities, though these areas often come with higher demand risks due to structural challenges. Leading the pack is Dessau-Roßlau in Saxony-Anhalt, with an impressive average yield of 7% for existing properties. By comparison, nearby cities Halle (Saale) and Magdeburg offer yields of 4.6% and 4.7% respectively. Görlitz, located on the Polish-Saxon border, ranks second with a yield of 6.9% for existing flats. Other cities in the top ten for existing property yields include Pirmasens (5.7%) in Rhineland-Palatinate and Wilhelmshaven (5.5%) in Lower Saxony.
For new-build flats, Görlitz tops the list with a rental yield of 4.1%. Northern and western German cities dominate the top ten for new-build yields. Celle in Lower Saxony holds second place with a 4% yield, followed by Solingen in North Rhine-Westphalia (3.9%), Worms in Rhineland-Palatinate (3.7%), and Neumünster in Schleswig-Holstein (3.6%).
