Germany's Residential Property Market Analysis 2024

Following a decade-long surge in house prices, Germany's housing market has faced challenges over the past two years due to economic uncertainty, elevated mortgage interest rates, and rising construction material costs, all of which have compounded affordability constraints.

Table of Contents

• Housing Market Snapshot
• Rental Market
• Supply Highlights
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

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During the year to Q2 2024, the nationwide house price index fell by 2.6% (-4.78% inflation-adjusted), following year-on-year declines of 5.13% in Q1 2024, 7.47% in Q4 2023, 10.41% in Q3 2023, and 9.86% in Q2 2023, based on figures from the Federal Statistical Office (Destatis). It was the seventh consecutive quarter of y-o-y price falls but the lowest in a row.

Quarter-on-quarter, nationwide house prices were up by 1.32% (0.3% inflation-adjusted) in Q2 2024.

By submarket:

• Primary market: the price index for new dwellings declined slightly by 0.07% (-2.3% inflation-adjusted) in Q2 2024 from a year earlier, an improvement from a y-o-y fall of 3.25% in Q2 2023. Quarterly, new house prices were up by 0.99% in Q2 2024 but dropped slightly when adjusted for inflation.
• Secondary market: the price index for existing dwellings fell by 3.04% (-5.21% inflation-adjusted) in Q2 2024 from a year earlier, an improvement from a y-o-y fall of 10.74% in Q2 2023. Quarter-on-quarter, existing prices were up by 1.45% (0.43% inflation-adjusted) in Q2 2024.

Germany's house price annual change

While there remains a strong real demand for housing, some potential homebuyers are now adopting a "wait-and-see" approach and others are temporarily shifting to the rental market because of high interest rates and economic uncertainty.

During 2023, Cushman & Wakefield recorded a total residential real estate transaction volume in Germany of just about €6.39 billion (US$6.94 billion), down by a huge 50% from a year earlier. But recently, demand is gradually recovering. In Q2 2024, transaction volume in the residential investment market rose by 37% y-o-y to €2.05 billion (US$2.23 billion). Transaction volume totaled €3.05 billion (US$3.31 billion) in H1 2024. Yet it remains far below the pre-pandemic level.

Worse, the situation has been exacerbated by the country's acute housing shortage and plunging residential construction activity. In the first eight months of 2024, the total number of dwelling permits issued in Germany fell sharply by 19.3% to 141,915 units as compared to the same period in the prior year, according to Destatis. This followed year-on-year contractions of 26.6% in 2023 and 7% in 2022.

As a result, Germany's housing market is expected to remain weak during the remainder of the year, with some market experts projecting another house price fall.

The German housing market was one of the few that avoided a slump in the wake of the 2008-2009 global financial crisis. In fact, from 2011 to 2019, Germany recorded a cumulative house price growth of 52% (38.1% inflation-adjusted). Years of very low interest rates have made it easy for households to move to larger, more expensive homes and for first-time buyers to get into the property ladder. The housing market continued to strengthen despite the Covid-19 pandemic, buoyed by the prevailing supply shortage in major cities. Nationwide house prices rose by 8.74% (9.02% inflation-adjusted) in 2020 and by another 12.61% (7.22% inflation-adjusted) in 2021.

The housing market started to cool in 2022, with nationwide house prices falling by 3.57% (-12.06% inflation-adjusted). During 2023, the housing market continued to struggle, with house prices plummeting by another 7.47% (-9.25% inflation-adjusted).

Germany suffered a mild economic contraction of 0.3% year-on-year in 2023, as high inflation and tight financing conditions weighed on consumption and investment, based on figures from Destatis. This was in contrast to annual growth of 1.4% in 2022 and 3.7% in 2021.

The overall economy is projected to remain fragile in the medium term. The European Commission expects Europe's biggest economy to grow by a minuscule 0.1% this year and by another 1% in 2025.

Local house price variations

In North-East Germany:

• In Berlin, apartment prices registered a slight decline of 0.99% during the year to Q3 2024 to a median price of €5,103 (US$5,546) per square meter (sq. m.), following a y-o-y fall of 7.23% in 2023. Likewise, the median price of one- and two-family houses dropped by 3.85% y-o-y to €3,750 (US$4,075) per sq. m.
• In Hannover, apartment prices increased slightly by 1.06% y-o-y to a median of €2,852 (US$3,100) per sq. m. in Q3 2024, following a huge fall of 14.59% in 2023. Over the same period, the median price of one- and two-family houses was down by 3.31% y-o-y to €2,515 (US$2,733) per sq. m.
• In Dresden, median apartment prices were down by 2.99% y-o-y to €2,890 (US$3,141) per sq. m. in Q3 2024, while one- and two-family houses increased by 2.74% to €3,185 (US$3,461) per sq. m. over the same period.
• In Hamburg, the median apartment price was up slightly by 0.49% y-o-y to €4,517 (US$4,909) per sq. m. in Q3 2024, following a 7.88% decline in 2023. Similarly, prices for one- and two-family houses rose by a meager 0.11% y-o-y to €3,558 (US$3,867) per sq. m.

In West Germany:

• In Dortmund, apartment prices declined by 2.3% to €2,124 (US$2,308) per sq. m. in Q3 2024 from a year earlier. In contrast, prices of one- and two-family houses increased slightly by 1.55% to €2,757 (US$2,996) per sq. m. over the same period.
• In Cologne, apartment prices rose by 1.36% y-o-y to a median of €3,579 (US$3,890) per sq. m. in Q3 2024. In contrast, one- and two-family houses had a slight price decline of 0.13% y-o-y to €3,121 (US$3,392) per sq. m. over the same period.
• In Düsseldorf, median apartment prices were down by an average of 5.58% y-o-y to €3,300 (US$3,586) per sq. m. in Q3 2024 while the median price of one- and two-family houses increased by 1.56% to €3,130 (US$3,402) per sq. m.

In South Germany:

• In Munich, apartments registered a slight price decline of 0.56% y-o-y to a median price of €7,079 (US$7,693) per sq. m. in Q3 2024. On the other hand, prices of one- and two-family houses were up by a minuscule 0.23% y-o-y to €6,041 (US$6,565) per sq. m. over the same period.
• In Frankfurt, apartment prices increased 4.33% to €4,024 (US$4,373) per sq. m. in Q3 2024 from the previous year. On the other hand, one- and two-family houses had a y-o-y price fall of 1.6% to €3,448 (US$3,747) per sq. m. over the same period.
• In Stuttgart, apartment prices declined by 2.58% y-o-y to a median price of €3,810 (US$4,141) per sq. m. in Q3 2024. Likewise, the median price of one- and two-family houses fell by 3.17% to €3,977 (US$4,322) per sq. m. over the same period.

All figures from Dr. Klein's trend indicator of property prices (DTI).

Rental Market

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Poor rental yields in Germany

Germany's rental yields are poor, partly because of recent strong price rises, but more importantly because investment in housing (including buy-to-let) used to be heavily subsidized by tax breaks. Many Germans live in rented accommodation, and only 51% of Germany's total households own their homes, according to Eurostat.

Gross rental yields in Germany's major cities averaged 3.67% in Q3 2024, slightly down from 3.74% in Q1 2024 but a bit higher as compared to 3.55% in Q3 2023, according to recent research conducted by the Global Property Guide.

In Germany's major cities, in Q3 2024:

• In Berlin, gross rental yields for apartments range from 2.4% to 5.63%, with a city average of 3.59%.
• In Frankfurt, apartment rental yields range from 2.86% to 4.85%, with a city average of 3.59%.
• In Stuttgart, apartments offer rental yields of around 3.55% to 5.47%, with a city average of 4.38%.
• In Munich, apartments offer returns of about 2.88% to 4.14%, with a city average of 3.5%.
• In Hamburg, rental yields range from 2.12% to 4.16%, with a city average of 3.2%.
• In Leipzig, rental yields range from 3.69% to 4.92%, with a city average of 4.28%.
• In Cologne, apartments have rental yields of between 2.49% and 4.22%, with a city average of 3.43%.
• In Düsseldorf, rental yields range from 2.9% to 4.32%, with a city average of 3.43%.

While rents continue to increase, they are hardly keeping pace with house price rises in the past three decades. Rents for existing contracts rose by 133.9% from 1990 to 2022, while rents for new contracts rose by 98.2%. On the other hand, the average price of apartments rose by 175.4%, while the price of terraced houses rose by 167%, according to BulwienGesa. The slight increase in rental yields recently can be partly attributed to a decline in house prices in 2023.

Berlin

Germany's capital, Berlin, is the seventh most populous urban area in the European Union. In the past years, the city's residential sector was buoyed by its young population and growing reputation as a European creative and media hub. It hosts several renowned universities, orchestras, museums, entertainment venues, and other creative industries.

It ranked 18th out of 241 cities included in Mercer's Quality of Living Index 2023.

In 2023, Berlin's population grew by 0.7% from the previous year to around 3.88 million people. There were a total of 187,971 new arrivals last year, the third highest level seen since 1991. According to JLL, this puts mounting pressure on the housing market, as demand has outpaced supply.

Berlin saw the completion of 15,965 flats in 2023, which represents a 7.8% drop compared to the previous year. This figure fell considerably short of the political goal of 20,000 new flats annually, a trend seen in prior years as well.

"The imbalance between supply and demand has particularly put pressure on rental price development. Against this background, the city of Berlin has adopted various regulatory measures such as the rental price brake, the capping limit, and milieu protection regulations to curb the rise in rents in the housing market and stimulate new housing construction," said JLL.

To facilitate this, the Berlin Senate approved a draft for an "Acceleration Act" in June 2024. The legislation is designed to implement shorter timelines and new standards for new construction. Key measures include streamlining and standardizing planning and approval processes, establishing inspection and processing deadlines, and clarifying the division of responsibilities between state and district authorities.

Hamburg

Hamburg is "Germany's Gateway to the World", and its port is Europe's third largest. It is Germany's second-largest city and the eighth-largest in the European Union, with an estimated population of 1.96 million people in 2023 - up by 1% from the prior year.

It is a major tourist destination, and its Speicherstadt was declared a World Heritage Site by UNESCO in July 2015.

Hamburg ranked 25th out of 241 cities included in Mercer's Quality of Living Index 2023. The city has flourishing small and medium-sized enterprises, as well as its international trade and business services sectors.

Though Hamburg's housing market is marked by a strong demand and inadequate supply, in 2023, housing construction in the city hit a low point, with a total of just 5,999 apartments finished, reflecting a 35% decrease from the previous year.

Prior to this, Hamburg's Senate also set a new-build target of 10,000 homes per annum and the city council plans to designate further large contiguous areas of land for housing construction. However, housing construction is now being hindered by high materials costs.

"To make housing affordable for households with medium income, the City of Hamburg has expanded the existing funding instruments to include a third funding path on April 1, 2024, with an initial net cold rent of €12.10 per square meter per month," said JLL.

Munich

Munich is Germany's third-largest city and is home to many major universities, museums, and architectural attractions. It is a traffic hub and is one of Germany's fastest-growing cities. It ranked the second highest (overall: 7th out of 241 cities) among major German cities in Mercer's Quality of Living Index 2023.

Due to the booming economy, continuously rising birth rates, and economic immigration, especially of young people between 18 and 30 years of age, the city's population has been continuously growing, only temporarily slowed down by the Covid-19 pandemic. Munich's population reached nearly 1.6 million people in 2023.

"The city of Munich's population will grow to a total of 1.812 million inhabitants by 2040, so the demand for housing will continue to be high in the future," said JLL.

"To cope with challenges in the construction area, Munich's city council has provided two billion euros for subsidized and climate-friendly living space in the housing action plan "Wohnen in München VII" by 2028. The programs have recently been significantly increased financially," added JLL.

In 2023, there were 9,837 apartments completed in the city, up strongly by 31% from the previous year.

The urban development of Munich is now focused on the revitalization of existing buildings and re-densification in inner-city locations.

Cologne

Cologne, Germany's fourth largest city, hosts more than thirty museums and hundreds of galleries. The city is known for its Cologne Carnival, kölsch beer, and the Cologne Cathedral.

In 2023, the city's population increased slightly by 0.3% from a year earlier, to reach 1,095,520 people, mainly driven by the young adult population and persons moving from other countries. By 2023, Cologne's population is projected to reach 1.11 million residents, which is expected to boost housing demand further.

On the supply side, a total of 3,211 building permits were issued in 2023, which is above the five-year average. The total number of apartments also reached 3,533 units in 2023, up by a huge 52% as compared to the prior year, according to the JLL report.

"The city of Köln is aiming to create and maintain affordable living quarters and is being supported by the housing promotion program 2024 of the state North Rhine-Westfalia, which comes with at least 100 million Euros in funding. This corresponds to an increase of five million Euros compared to the previous year," said JLL.

Frankfurt

Frankfurt is the fifth largest city in Germany, with an estimated population of around 800,000 people. It is Germany's financial center and is known for its major trade fairs such as Messe Frankfurt, one of the largest in the world; Frankfurt Motor Show, the largest motor show in the world; and Frankfurt Book Fair, also the largest in the world.

Frankfurt ranked the highest (overall: 6th out of 241 cities) among major German cities in Mercer's Quality of Living Index 2023.

In 2023, apartment completions totaled 3,661 units, up strongly by 24% from a year earlier. However, project developers are hesitant to increase new residential construction, which is expected to have an adverse impact in the completion rates in Frankfurt in the years ahead. In 2023, there were only 3,205 building permits granted for new apartments, down by 30% from the prior year and the lowest level recorded since 2010.

"The City of Frankfurt am Main is currently working on the further development of municipal funding programs and the designation of further building areas. These measures are intended to ensure that more new apartments are in demand again despite the difficult market situation. Approximately 250 million Euros are available in the 2024/25 budget for subsidized housing construction," said the JLL report.

Stuttgart

Stuttgart is Germany's sixth-largest city and is known as the Cradle of the Automobile. It ranked 26th in Mercer's latest Quality of Living Index.

In 2023, a total of 1,891 apartments were completed, up by a whopping 86% as compared to a year earlier and at par with its pre-pandemic level. However, building permits fell by 6% y-o-y to only 1,092 last year - the lowest level registered in the past decade.

According to JLL's H1 2024 housing market report, the city of Stuttgart aims to build 20,000 apartments by 2033. Alongside the approval of new development plans, 30% of the newly developed units will be designated as social housing in collaboration with the private sector. Additionally, 10% of the apartments will be offered below the local market average rental rates, or as affordable condominiums or rental units for households with moderate incomes.

Publicly owned housing companies and cooperatives were the city's biggest net investors, followed by professional asset and fund managers.

Düsseldorf

Düsseldorf, Germany's seventh largest city has a population of about 640,000. It ranked 10th in Mercer's Quality of Living Index 2023.

In 2023, new apartment completions totaled 2,063 units, down by 3.6% compared to the prior year and considerably below the five-year average. On the other hand, the total number of building permits granted for new apartments increased slightly by 2.8% y-o-y to 2,251 last year. Though it remains far below the average of 3,800 apartments permitted annually before the pandemic.

"Due to persistently high construction costs and interest rates, housing construction in Düsseldorf came to a standstill in the first half of 2024. To rekindle house construction and provide new impetus, the city of Düsseldorf is planning the development of new funding programs," said JLL. "For this, a double-digit million amount will be made available every year in the future. In addition, the city wants to create a total of 8,000 new affordable apartments in the city area by 2030."

Supply Highlights

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Residential construction activity plummeting

In the first eight months of 2024, the total number of dwelling permits issued in Germany fell sharply by 19.3% to 141,915 units as compared to the same period in the prior year, according to Destatis. This followed year-on-year contractions of 26.6% in 2023 and 7% in 2022.

Germany has suffered an acute housing shortage for decades. In the mid-1990s there was a substantial drop in housing completions, in part caused by policy changes such as a rise in VAT from 3% to 19% in 2007, and the abolition of owner purchase subsidies.

From an annual average of 476,000 permits from 1992 to 1999, dwelling permits fell substantially to an average of 222,000 permits every year from 2001 to 2015. Dwelling permits increased by 4% y-o-y to 360,578 units in 2019, by 2.2% to 368,439 units in 2020, and by another 3.4% to 380,914 units in 2021, following y-o-y declines of 0.3% in 2018 and 7.3% in 2017, according to figures from Destatis. However, it is still insufficient to meet surging demand. This was exacerbated by the 7% fall in the total number of dwelling permits in 2022, to just 354,403 units, and by another 26.6% plunge in 2023, to just 260,071 units.

The country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

Germany had a total dwelling stock of about 43.37 million units by 2023, up by 0.7% from a year earlier.

The influx of refugees exacerbates the housing shortage

Germany took in around 1.1 million asylum seekers in 2015 and another 280,000 refugees in 2016. In September 2017, Chancellor Angela Merkel agreed to cap the number of refugees Germany accepts at 200,000 annually.

Aside from the tight housing supply, one problem is that refugees tend to locate themselves in big cities, such as Berlin, where the housing supply is even tighter. They compete for housing units with locals and migrants (mainly from other parts of Europe) who are in the country to work, resulting in further pressure on house prices.

In 2020, Germany recorded 102,500 asylum applicants - accounting for about 24.6% of all first-time applicants in the EU-27, according to Eurostat. However, this is down by 28% from a year earlier and the fourth year in a row that first-time asylum applications have fallen.

"Due to the Covid-19 outbreak, and the related introduction of movement restrictions and border closures, some countries have applied certain administrative measures (e.g. temporary closure of asylum authorities, suspension of asylum interviews, suspension of lodging applications), which resulted in a drop in the number of asylum applications in 2020," said the Eurostat.

On December 31, 2020, the German government lifted the ban on deportations of Syrian nationals, allowing the country to deport those deemed to pose a risk to security. The ban had been in place since 2012 and was repeatedly extended due to the ongoing civil war in Syria.

As the situation normalized, the number of refugees in Germany rose sharply again in the past three years. During 2022, total asylum applications rose nearly 28% y-o-y to 244,132, following an annual growth of 56.2% in 2021, according to the Federal Office for Migration and Refugees (BAMF).

This does not yet include the more than one million Ukrainians seeking protection in Germany. Ukrainians do not need to apply for asylum to remain in Germany due to the war in their country and are therefore not included in the asylum statistics.

On March 4, 2022, the European Council introduced temporary protection for people fleeing Ukraine as a consequence of Russia's invasion. Accordingly, temporary protection is an exceptional measure to provide immediate and temporary protection to displaced persons from non-EU countries and those unable to return to their country of origin.

During 2023, Germany received a total of 351,915 asylum applications, up by a whopping 44.1% from a year earlier.

Then in the first half of 2024, the country received around 124,000 applications, which represents almost a quarter of all applications in the EU+ countries, according to the European Union Agency for Asylum (EUAA). However, it actually declined by about 20% compared to the same period in 2023.

Around 270,000 new asylum applications are expected in Germany for the whole year of 2024.

Mortgage Market

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Housing loan interest rates falling gradually

Interest rates for housing loans have been falling gradually in recent months, following the ECB's move to shift its monetary policy and start cutting its key interest rates to boost economic activity amidst easing inflationary pressures.

In September 2024, the average interest rate for new housing loans was 3.71%, down from 4.12% in the previous year but still up from 3.01% two years ago, according to Deutsche Bundesbank. Over the same period:

• Floating rate or initial rate fixation (IRF) up to 1 year: 5.27%, slightly down from 5.4% in September 2023 but still far higher than the 2.73% in September 2022.
• IRF 1-5 years: 3.99%, lower than the 4.48% a year earlier but still up from 2.93% two years ago.
• IRF 5-10 years: 3.4%, down from 3.89% in the previous year but still up from 2.96% two years ago.
• IRF over 10 years: 3.47%, down from 3.85% in the previous year but still up from 3.18% two years earlier.

Housing loan interest rates in Germany continuously declined from late-2008 to 2020, after the ECB cut its base rate to a record low of 0%. However, interest rates for housing loans rose tremendously from 2022 to 2023, after the ECB introduced a contractionary monetary policy to rein in inflationary pressures. As inflation eases, the ECB started to reverse its monetary policy in June 2024.

Germany's conservative mortgage market

New housing loans are now surging, amidst gradually declining interest rates. In the first nine months of 2024, the total value of new housing loans reached €145.94 billion (US$158.72 billion), up by a huge 19.9% from the same period last year. This is in stark contrast to the annual decline of 37.4% recorded in the whole year of 2023.

By initial rate fixation (IRF):

• New housing loans with IRF of up to 1 year: €17.26 billion (US$18.76 billion) in the first nine months of 2024, down by 9.3% from a year earlier.
• New loans with IRF 1-5 years: €15.02 billion (US$16.33 billion), up by 24.7% from a year earlier.
• New loans with IRF 5-10 years: €54.02 billion (US$58.75 billion), up sharply by 23.3% from the previous year.
• New housing loans with IRF over 10 years: €59.65 billion (US$64.87 billion), up by a huge 27.4% from a year ago.