German house prices are in freefall

After a decade-long house price boom, Germany’s housing market is now struggling, as higher mortgage interest rates and rising inflation have compounded affordability constraints.

During the year to Q3 2023, the nationwide house price index fell sharply by 10.23% (-13.41% inflation-adjusted), following year-on-year declines of 9.62% in Q2 2023, 6.8% in Q1 2023, and 3.57% in Q4 2022, based on figures from the Federal Statistical Office (Destatis). It was its weakest performance in recent history.

Quarter-on-quarter, nationwide house prices dropped by 1.4% (-2.1% inflation-adjusted) in Q3 2023.

By submarket:

• Primary market: the price index for new dwellings declined by 4.45% (-7.84% inflation-adjusted) in Q3 2023 from a year earlier, in contrast to the y-o-y growth of 5.92% in Q3 2022. Quarterly, new house prices fell slightly by 0.55% (-1.26% inflation-adjusted) in Q3 2023.
• Secondary market: the price index for existing dwellings plunged by 11.19% (-14.34% inflation-adjusted) in Q3 2023 from a year earlier, its fourth consecutive quarter of y-o-y fall and the worst showing in recent history. Quarter-on-quarter, existing prices fell by 1.52% (-2.22% inflation-adjusted).

Germany’s house price annual change

While there remains a strong real demand for housing, potential homebuyers are now temporarily shifting to the rental market because of rising interest rates and high inflation, which is now eroding their purchasing power.

During 2023, Cushman & Wakefield recorded a total residential real estate transaction volume in Germany of just about €6.39 billion (US$6.89 billion), down by a huge 50% from a year earlier. Likewise, based on figures from Savills, the total value of residential properties traded (including only transactions with at least 50 units) in Germany plummeted by 38% y-o-y to €7.5 billion (US$8.08 billion) in 2023 – the lowest level since 2011.

Worse, the situation has been exacerbated by the country’s acute housing shortage and plunging residential construction activity. In the first eleven months of 2023, the total number of dwelling permits issued in Germany fell by a huge 25.8% y-o-y to 238,889 units, according to figures from Destatis. This followed a y-o-y contraction of 7% during 2022.

As a result, Germany’s housing market is expected to remain weak this year, with some market experts projecting another double-digit 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).

HOUSE PRICE INDEX, ANNUAL CHANGE (%)
Year	Nominal	Inflation-adjusted
2009	2.93	2.52
2010	-0.48	-1.83
2011	4.18	1.91
2012	4.93	2.86
2013	1.53	0.19
2014	3.44	2.92
2015	5.82	5.49
2016	8.45	7.25
2017	6.25	4.51
2018	6.22	4.69
2019	6.50	5.19
2020	8.74	9.02
2021	12.61	7.22
2022	-3.57	-12.06
Sources: Destatis, Global Property Guide

The German economy suffered a mild 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 1.8% in 2022 and 3.2% in 2021.

The European Commission expects Europe’s biggest economy to grow by a minuscule 0.8% this year and by another 1.2% in 2025.

“With demand from Germany’s main trading partners stabilizing, the contribution from net trade is projected to be broadly neutral in 2024 and mildly positive in 2025. Germany is expected to see an increase in current account surpluses towards 6.5% over the forecast horizon. Overall, growth is forecast to increase to 0.8% in 2024 and to 1.2% in 2025,” said the European Commission.

Local house price variations

In North-East Germany:

• In Berlin, apartment prices registered a decline of 7.23% during 2023 to a median price of €5,036 (US$5,429) per square meter (sq. m.), in stark contrast to a y-o-y growth of 6.17% in 2022. Likewise, the median price of one- and two-family houses dropped 6.32% y-o-y to €3,839 (US$4,138) per sq. m.
• In Hannover, apartment prices plummeted by 14.59% to a median price of €2,711 (US$2,922) per sq. m. during 2023, following a meager growth of 0.77% in the prior year. Over the same period, the median price of one- and two-family houses was down by 8.3% y-o-y to €2,544 (US$2,742) per sq. m.
• In Dresden, median apartment prices were down by 5.58% y-o-y to €3,000 (US$3,234) per sq. m. last year, while one- and two-family houses declined by 5.15% to €2,955 (US$3,185) per sq. m.
• In Hamburg, median apartment prices fell by 7.88% y-o-y to €4,476 (US$4,825) per sq. m. in 2023. Similarly, prices for one- and two-family houses dropped sharply by 9.19% to €3,493 (US$3,765) per sq. m.

In West Germany:

• Dortmund had the biggest apartment price fall in the region, declining by 12% to €2,174 (US$2,344) per sq. m. in Q3 2023. Prices of one- and two-family houses also dropped by a more modest 5.09% to €2,715 (US$2,927) per sq. m.
• In Cologne, median apartment prices fell by 10.36% y-o-y to €3,531 (US$3,806) per sq. m. in Q3 2023. One- and two-family houses had a price decline of 8.5% y-o-y to €3,125 (US$3,369) per sq. m. over the same period.
• In Düsseldorf, median apartment prices were down by an average of 8.12% to €3,495 (US$3,767) per sq. m. in Q3 2023 while the median price of one- and two-family houses fell by 8.55% to €3,082 (US$3,322) per sq. m.

In South Germany:

• Munich saw the biggest y-o-y decline in median apartment price in the region, at 15.25% to €7,119 (US$7,674) per sq. m. in Q3 2023. Likewise, prices of one- and two-family houses fell by 10.84% y-o-y to €6,027 (US$6,497) per sq. m. over the same period.
• In Frankfurt, apartment prices dropped 10.76% to €3,857 (US$4,158) per sq. m. in Q3 2023 from the previous year. One- and two-family houses had a y-o-y price fall of 8.43% to €3,504 (US$3,777) per sq. m.
• In Stuttgart, apartment prices declined by 13.78% y-o-y to a median price of €3,911 (US$4,216) per sq. m. in Q3 2023. Also, the median price of one- and two-family houses fell by 8.47% to €4,107 (US$4,427) per sq. m. over the same period.

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

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 3.74% in Q1 2024, slightly up from 3.55% in Q3 2023, according to research conducted by the Global Property Guide in January 2024.

In Germany’s major cities, in Q1 2024:

• In Berlin, gross rental yields for apartments range from 2.87% to 4.95%, with a city average of 3.83%.
• In Frankfurt, apartment rental yields range from 2.48% to 4.95%, with a city average of 3.63%.
• In Stuttgart, apartments offer rental yields of around 3.58% to 5.29%, with a city average of 4.32%.
• In Munich, apartments offer returns of about 2.67% to 3.64%, with a city average of 3.26%.
• In Hamburg, rental yields range from 2.02% to 3.95%, with a city average of 3.17%.
• In Leipzig, rental yields range from 3.84% to 5.14%, with a city average of 4.43%.
• In Cologne, apartments have rental yields of between 2.95% and 4%, with a city average of 3.64%.
• In Düsseldorf, rental yields range from 2.45% to 4.97%, with a city average of 3.66%.

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.

For several years, Berlin has recorded a population growth of about 40,000 to 60,000 annually, mainly due to inward migration. Berlin has currently a population of around 3.6 million and an average population growth rate of 5% in the past five years. According to JLL’s forecast, Berlin requires about 18,500 new apartments annually until 2030 to address the severe housing shortage in the city.

“The current construction surplus amounts to a total of 8,912 apartments. The construction backlog has decreased only marginally over the past year and presents the city of Berlin with some challenges in the housing market to create both affordable and suitable housing,” said JLL.

On January 30, 2020, Berlin adopted a law to freeze rents in the city, which came into force on February 23, 2020. The rent cap covered all residential space completed before January 1, 2014, with rents frozen at the level of the rent on June 18, 2019. The policy was intended to be in place for five years. However, in April 2021, Berlin’s rent cap was declared unconstitutional.

The immediate implications of the court ruling are tremendous. With the lifting of the rent cap, landlords can now demand increases on existing leases. They are also entitled to demand back payments on previously frozen rents.

BERLIN: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Europacity Berlin	Moabit	2,800	2025
Havelufer Quartier	Hakenfelde	1,800	2024
Quartier Ringslebenstraße	Buckow	1,100	2027
Halske Sonnengärten	Siemensstadt	950	2024
Speicherballett	Hakenfelde	630	2026
Wasserstadt Oberhavel	Spandau	7,500	2027
Quartier Elisabeth-Aue	Pankow	5,000	2029
Berlin TXL	Tegel	5,000	2041
Tempelhofer Feld	Tempelhofer Damm	4,700	2030
Neues Gartenfeld	Spandau	3,800	2031
Stadtquartier Buch	Pankow	2,700	2029
Neulichterfelde	Lichterfelde	2,695	2032
Source: JLL

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 1.79 million people in 2023. 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. Hamburg’s population growth was around 4.6% in the past six years.

To meet the strong demand in recent years, construction activity in Hamburg has been rising remarkably strongly. Hamburg’s Senate recently 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. After a slowdown in 2020-21 due to the Covid-19 pandemic, construction activity is increasing again. However, it is now being hindered by high materials costs.

“The demand for housing will continue in the coming years,” said JLL, thanks to the city’s attractiveness and importance as a university and business location. However, “increased construction costs and a shortage of suitable building land pose the greatest challenges for the city in the coming years.”

HAMBURG: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Quartier Dudenweg	Billstedt	660	2024
Quartier Ü30 Ipanema	Winterhude	525	2024
Luisenhof Wohnviertel	Farmsen-Berne	275	2024
Stadtteil Oberbillwerder	Oberbillwerder	6,650	2038
Source: 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 growing strongly. Munich’s population recently reached 1.58 million, about 4.1% cumulative growth in the past seven years. Demand will remain strong in the coming years. To meet current and future demand, the city council has set a goal of building about 120,000 apartments by 2030.

“In the rental market in particular, it can be observed that all segments are showing steady growth and that smaller apartments in particular are increasing in demand,” said JLL.

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

MUNICH: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Neufreiraum	Schwabing-Freimann	5,500	2029
Alexisquartier	Ramersdorf-Perlach	1,350	2028
Wohnquartier McGraw-Kaserne	Obergiesing	1,000	2027
Beamten-City Oberwiesenfeld	Neuhausen-Nymphenburg	615	2024
Freiham Wohnquartier Nord	Freiham-Nord	8,000	2040
Quartier Paul-Gerhardt-Allee	Obermenzin	2,400	-
Source: JLL

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.

With population growth of about 4.1% from 2013 to the pre-pandemic year of 2019 and supply growth of barely 2%, there is a housing shortage in the city. Completions were just between 2,000 and 3,000 units, significantly lower than the local government’s target of more than 4,o00 new apartments annually. While there has been negative net migration and a slowdown in population growth in recent years amidst the pandemic, Cologne still needs additional housing supply.

“With a demand of around 33 housing units p.a. per 10,000 inhabitants, the housing market in Cologne is at a lower level compared with the other Big 8 cities,” said JLL.

The biggest demand is seen in the lower-priced housing segment. However, high land prices and materials costs are currently holding back new residential construction.

COLOGNE: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Clouth-Quartier	Nippes	1,200	2024
Stockholmer Allee	Chorweiler	1,200	2026
Gutenberg-Karree	Neuehrenfeld	65	2024
Parkstadt Süd	Luxemburger Strasse	3,500	2037
Deutzer Hafen	Innenstadt	3,000	2035
Source: JLL

Frankfurt

Frankfurt is the fifth largest city in Germany, with an estimated population of 796,000 people in 2023. 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. It ranked the highest (overall: 6th out of 241 cities) among major German cities in Mercer’s Quality of Living Index 2023.

Frankfurt saw substantial population growth in recent years. Frankfurt had a population growth rate of around 5.8% in the past seven years – one of the highest among the Big 8 cities after Leipzig and Berlin, according to JLL. Inward migration, especially amongst the 18 to 30-year age group, remains high. Population growth is focused on the large new-build districts such as Riedberg in the north (peripheral districts) and the Europaviertel (City Centre I).

Housing completions averaged around 3,500 annually over the past six years and continue to surge, to meet strong demand. However, most construction activity is focused on the upper price segment, in the form of residential towers and high-end condominium apartments.

FRANKFURT: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Wohnquartier Franky	Gallus	1,300	2025
Quartier Oststern	Ostend	500	2025
Wohnprojekt Nieder Loch	Nied	300	2025
Source: JLL

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.

The number of households grew by 4.3% annually in the past five years while housing stock increased by just 2.4% units per year. After falling slightly in 2020 due to the Covid-19 pandemic, the city’s population grew again in the following years, reaching about 635,000 people in 2022. However, in 2023, the city’s population was more or less unchanged.

The local government set an annual target of 1,800 new homes over the next ten years, but given the current construction deficit and the fact that Stuttgart has one of the lowest number of completions per inhabitant among Germany’s major cities, it is now doubtful whether the city’s target is sufficient to meet future demand.

“A challenge for the Stuttgart housing market in the future will not only be the high demand for housing but also the scarcity of residential building land. In addition to internal development and high-quality redensification, the development of building land in the outer areas of the city limits is to be promoted, above all with the help of the Stuttgart model,” said JLL.

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

STUTTGART: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Keltersiedlung Zuffenhausen	Zuffenhausen	265	2024
Wohnbauprojekt am Eschbach	Freiberg	128	2024
Source: JLL

Düsseldorf

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

From 2011 to 2019, the city’s population growth was around 8.7% while the number of households increased by has risen by 3.5%. However, in the succeeding three years, net migration and population declined due to the Covid-19 pandemic.

“By 2030, 26 housing units per 10,000 residents need to be completed per year according to the median scenario. Thus, there is no mismatch between needs and completions,” said JLL. “Compared with the other Big 8 cities, Düsseldorf is only in the middle of the pack in terms of completed apartments, but still has the best ratio between completion levels and housing demand.”

DÜSSELDORF: SELECTED RESIDENTIAL DEVELOPMENTS, 2023
Project Name	Location	Units	Completion
Quartier Westfalenstraße Nord	Rath	500	2024
Quartier Ulmer Höh	Derendorf	370	2025
Source: JLL

Residential construction activity plummeting

In the first eleven months of 2023, the total number of dwelling permits issued in Germany fell by a huge 25.8% to 238,889 units as compared to the same period in the prior year, according to figures from Destatis. This followed a y-o-y contraction of 7% during 2022 and annual growth of 3.4% in 2021, 2.2% in 2020 and 4% in 2019.

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 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.

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 normalizes, refugees in Germany have been rising 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.

Housing loan interest rates surging

Interest rates for housing loans have been rising rapidly in recent months, following the ECB’s successive key interest rate hikes.

In December 2023, the average interest rate for new housing loans was 4.05%, sharply up from 3.52% a year earlier and 1.32% two years ago, according to Deutsche Bundesbank. Over the same period:

• Floating rate or initial rate fixation (IRF) up to 1 year: 5.56%, sharply up from 3.57% in December 2022 and 1.8% in December 2021
• IRF 1-5 years: 4.44%, up from 3.74% a year earlier and 1.39% two years ago
• IRF 5-10 years: 3.8%, up from 3.41% in the previous year and 1.16% two years ago
• IRF over 10 years: 3.65%, up from 3.55% in the previous year and 1.34% 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 have been rising tremendously since 2022, after the ECB introduced a contractionary monetary policy to rein in inflationary pressures.

Germany’s conservative mortgage market

The mortgage market was equivalent to 44% of the country’s GDP in 2023 - an unusually low level for a developed economy, a huge plunge from 82.2% of GDP in 1998. In Q3 2023, outstanding housing loans amounted to €1.8 trillion (US$1.94 trillion), up by 2.21% from a year earlier, according to figures from Deutsche Bundesbank.

However, new housing loans fell sharply by 37.4% to €161.15 billion (US$173.72 billion) during 2023 as compared to €257.38 billion (US$277.45 billion) in the prior year, amidst the recent surge in interest rates. During 2023:

• New housing loans with IRF of up to 1 year: €24.32 billion (US$26.21 billion), down by 18.2% from a year earlier
• New loans with IRF 1-5 years: €16.58 billion (US$17.88 billion), down by 11.8% a year earlier
• New loans with IRF 5-10 years: €58.39 billion (US$62.95 billion), down sharply by 38.8% from the previous year
• New housing loans with IRF over 10 years: €61.86 billion (US$66.68 billion), down by a huge 45.5% from a year ago

Germans’ conservative borrowing is often attributed to the hyperinflation experienced in the 1920s, says Deutsche Bank real estate economist JochenMoebert. However, the changes in tax incentives are likely to be a better explanation of the general decline in the mortgage loans to GDP ratio.