As housing shortages persist, experts predict significant rent increases and a rise in purchase prices in the German real estate market by 2025.
As the specter of a housing shortage looms ominously over Germany, real estate experts are bracing for a significant surge in rental prices by 2025. The trajectory of purchase prices, having recently experienced a downturn, is also anticipated to ascend, albeit modestly.
Despite a palpable eagerness among numerous households to embark on new construction projects, the persistent high costs associated with labor and materials remain a formidable barrier. Furthermore, the recent decline in interest rates, while a welcome development, fails to sufficiently offset the exorbitant expenses tied to construction and land acquisition. Consequently, the housing market continues to be characterized by scarcity and fierce competition, particularly within urban centers, which inevitably impacts rental rates.
The chronic housing deficit in Germany is exacerbated by factors such as insolvencies within the construction sector and ongoing immigration trends. The construction industry association, ZDB, projects a mere 250,000 to 255,000 completions nationwide in 2024, starkly contrasting with the federal government’s ambitious target of 400,000 new apartments annually.
Recent data from JLL, as reported by the German Press Agency, reveals a pronounced escalation in rental prices during the third quarter, extending even to rural locales. Major metropolitan areas have witnessed rent increases of approximately eight percent compared to the previous year, while regional centers have experienced a rise of around 4.5 percent. In less urbanized areas, rents have climbed by about 4 percent, reflecting a broader trend of inflationary pressures.
The inflationary environment has further strained the rental market, as individuals who previously aspired to homeownership are now compelled to seek rental accommodations due to soaring interest rates. The widening chasm between robust demand and constrained housing supply, coupled with inflation-induced income growth, has exacerbated the situation. A recent study conducted by the German Institute for Economic Research across more than 150 cities indicates that rent increases are projected to accelerate to approximately four percent in 2024, surpassing the growth rates observed during previous real estate booms.
The ramifications of escalating housing costs are particularly acute in Germany, which stands out as the only EU nation with a higher proportion of tenants than homeowners. According to Eurostat, the homeownership rate languished below 47 percent in 2023. A survey conducted by the Dutch bank ING underscores the burden of housing costs on tenants, revealing that 26 percent of respondents find it “difficult” or “very difficult” to meet their housing expenses, in stark contrast to only 12 percent of homeowners expressing similar concerns.
Looking ahead to the new year, it is not only rents that are poised for an uptick; purchase prices are also expected to rise. Following a significant correction in 2023, real estate prices have shown signs of a slight rebound since the summer, as noted by the Federal Statistical Office. In the third quarter, JLL observed only modest growth, even in major urban centers. While the real estate market appears to be regaining momentum, the financial burden of purchasing or constructing remains prohibitive for many. Properties with outdated gas or oil heating systems, for instance, face considerable challenges in the market. In cases where energy efficiency is subpar and defects are present, price reductions of 15 to 20 percent are not uncommon, with renovation costs becoming a critical factor in price negotiations.
The recent decline in construction interest rates has provided a glimmer of hope for prospective buyers. According to FMH Financial Consulting, the interest rate for ten-year loans recently dipped to 3.2 percent, down from 3.6 percent a year prior. This improvement has significantly enhanced the financing landscape for real estate applicants in 2024. However, the market has already adjusted to anticipated further cuts in key interest rates by the European Central Bank.
Ultimately, the interplay between economic conditions and the real estate sector remains pivotal, and the current economic climate in Germany is decidedly tepid. The future of the German real estate market, therefore, hangs in a delicate balance, influenced by a myriad of factors that will shape the experiences of both tenants and buyers in the years to come.
