After a decade of strong house price increases, Germany’s housing market is now showings signs of a slowdown, as higher mortgage interest rates and rising inflation have compounded affordability constraints.
During 2022, the nationwide house price index fell by 3.57% (-12.06% inflation-adjusted), in stark contrast to year-on-year rises of 12.61% in 2021, 8.74% in 2020, 6.5% in 2019, 6.22% in 2018, and 6.25% in 2017, based on figures from the Federal Statistical Office (Destatis).
Germany’s house price annual change
Quarter-on-quarter, nationwide house prices dropped 5% (-6.6% inflation-adjusted) in Q4 2022.
- Primary market: the price index for new dwellings rose slightly by 1.5% in 2022 from a year earlier but actually declined by 7.44% when adjusted for inflation. This is in contrast to the y-o-y growth of 8.35% (3.16% inflation-adjusted) in 2021.
- Secondary market: the price index for existing dwellings fell by 4.41% (-12.83% inflation-adjusted) last year, a sharp turnaround from an annual increase of 13.43% (8.01% inflation-adjusted) in 2021.
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.
“The high demand in the German residential rental markets can be attributed to a number of factors. The population continued to grow significantly in 2022. According to an initial estimate by the Federal Statistical Office (Destatis), the German population was at least 84.3 million at the end of 2022, an increase of 1.1 million compared to the end of 2021. A significant contributor to this growth was net migration,” said JLL.
“The second driver, rising interest rates, has resulted in increasing costs of home ownership, causing a shift in real demand from the first-time buyer segment to the rental market. The third long-term driver on the demand side is the change in demographic structure,” added JLL.
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.
HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: Destatis, Global Property Guide|
Germany’s economy grew by 1.8% in 2022 from a year earlier, supported by an increase in demand following the post-pandemic reopening of the economy. Yet it was a slowdown from year-on-year expansion of 2.6% in 2021.
The German economy is expected to suffer another mild contraction in early-2023, amidst the continuous increase in energy prices for households and the slowdown in export growth due to weak foreign demand. As a result, the European Commission expects Europe’s biggest economy to grow by a minuscule 0.2% this year.
Local house price variations
In North-East Germany:
- In Berlin, apartments continued to register healthy price rises of 6.17% during 2022 to a median price of €5,615 (US$6,168) per square meter (sq. m.). The median price of one- and two-family houses rose by 5.37% y-o-y to €4,180 (US$4,592) per sq. m.
- In Hannover, apartment prices rose by a meager 0.77% to a median price of €3,333 (US$3,661) per sq. m. during 2022. Over the same period, the median price of one- and two-family houses increased 3.89% y-o-y to €2,793 (US$3,068) per sq. m.
- In Dresden, median apartment prices were up slightly by 1.54% y-o-y to €3,333 (US$3,661) per sq. m. last year, while one- and two-family houses increased by 1.6% to €3,085 (US$3,389) per sq. m.
- In Hamburg, median apartment prices fell by 4.34% y-o-y to €5,222 (US$5,736) per sq. m. in 2022. Prices for one- and two-family houses, on the other hand, rose by 3.52% to €3,929 (US$4,316) per sq. m.
In West Germany:
- Dortmund had the highest apartment price increase in the region, rising by 5.98% to €2,371 (US$2,605) per sq. m. during 2022. Prices of one- and two-family houses also rose by a modest 3.53% to €2,881 (US$3,165) per sq. m.
- In Cologne, median apartment prices rose by 4.14% y-o-y to €3,965 (US$4,356) per sq. m. last year. One- and two-family houses had a price increase of 5.3% y-o-y to €3,389 (US$3,723) per sq. m.
- In Düsseldorf, median apartment prices rose by 2.03% to €3,764 (US$4,135) per sq. m. during 2022 while the median price of one- and two-family houses increased by 3.42% to €3,478 (US$3,821) per sq. m.
In South Germany:
- In Munich, the median apartment price fell by 2.05% y-o-y to €8,333 (US$9,154) per sq. m in 2022. On the other hand, prices of one- and two-family houses increased slightly by 1.58% to €6,715 (US$7,376) per sq. m over the same period.
- In Frankfurt, apartment prices dropped 4.98% to €4,375 (US$4,806) per sq. m. in 2022 from the previous year. One- and two-family houses had a y-o-y price increase of 1.69% y-o-y to €3,740 (US$4,108) per sq. m.
- Stuttgart had the smallest y-o-y apartment price decline in South Germany in 2022, falling by a minuscule 0.23% y-o-y to a median price of €4,461 (US$4,900) per sq. m. Also, Stuttgart saw the biggest annual price increase of one- and two-family houses, at 4.6% to €4,370 (US$4,800) per sq. m.
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 range from 2% to 4.5% in Germany’s major cities, according to research conducted by the Global Property Guide in November 2022.
- Munich apartments have a rental yield of 2.14% to 3.74% with a city average of 2.78%.
- Berlin apartments earn a rental yield between 1.93% and 4.44% with an average of 2.84%.
- Frankfurt apartments yield between 2.14% and 5.16% with an average of 3.37%.
- Stuttgart apartments have a rental yield of between 2.84% and 4.72% with an average of 3.81%.
- Hamburg apartments earn a gross rental yield of 1.54% to 5.71% with an average of 2.83%.
- Leipzig apartments earn a yield between 2.29% and 3.80% with an average of 3.18%.
- Cologne apartments have a yield between 2.53% and 3.91% with an average of 3.04%.
- Düsseldorf apartments earn a gross rental yield of 2.35% to 4.04% with an average of 3.09%.
While rents continue to increase, they are hardly keeping pace with price rises. 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.
Germany’s capital, Berlin, is the seventh most populous urban area in the European Union. The city’s residential sector has been boosted 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 13th out of 231 cities included in Mercer’s Quality of Living Index.
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, 2022
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. It is a major tourist destination, and its Speicherstadt was declared a World Heritage Site by UNESCO in July 2015.
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, construction activity in Hamburg has been rising remarkably strongly in recent years. 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, 2022
|Quartier Ü30 Ipanema||Winterhude||525||2024|
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 highest (overall: 3rd out of 231 cities) among major German cities in Mercer’s Quality of Living Index.
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 1.562 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.
“The steady positive population trend as well as the scarcity of living space in central residential locations and the demand for smaller apartments remain the drivers of the high demand for housing this year,” said JLL.
The urban development of Munich is now focused on the revitalization of existing buildings and on re-densification in inner-city locations.
“In Fürstenried West, among other things, 660 new apartments are to be built in the existing housing estate of the Bayerische Versorgungskammer. In addition, a new neighborhood with around 1,500 apartments is to be built in the Trudering-Riem district,” noted JLL.
MUNICH: SELECTED RESIDENTIAL DEVELOPMENTS, 2022
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 clearly 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 is negative net migration and a slowdown in population growth in recent years amidst the pandemic, Cologne still needs additional housing supply to meet the strong demand.
“At 9,400 apartments, net migration (around -9,600 people in 2021) with the surrounding area and a slowdown in population growth in recent years, there remains a positive need for additional housing,” said JLL. “Demographic changes such as a rapidly growing proportion of younger households (18 to under 30-year olds) are leading to a further increase in demand via a qualitative change in demand.”
The biggest demand is seen in the lower-priced housing segment. But high land prices and materials costs are currently holding back new residential construction.
COLOGNE: SELECTED RESIDENTIAL DEVELOPMENTS, 2022
Frankfurt is the fifth largest city in Germany. 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 7th in Mercer’s Quality of Living Index.
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, in an effort 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, 2022
|Wohnprojekt Nieder Loch||Nied||300||2025|
Stuttgart is Germany’s sixth-largest city and is known as the Cradle of the Automobile. It ranked 27th 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 has been growing again, reaching about 635,000 people in 2022.
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 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 existing and future demand.
“Despite an increase in the number of building permits in 2021 (1,835), the number of completed apartments is not sufficient to meet demand. The construction backlog is quite high, with 5,174 apartments for which construction has not yet started or is still under construction. This is the highest level since 2014 (5,183 apartments),” 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, 2022
|Wohnbauprojekt am Eschbach||Freiberg||128||2024|
Düsseldorf, Germany’s seventh largest city has a population of about 620,000. It ranked 6th in Mercer’s Quality of Living Index.
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%. Though in the succeeding two 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, 2022
|Quartier Westfalenstraße Nord||Rath||500||2024|
|Quartier Ulmer Höh||Derendorf||370||2025|
Residential construction activity remains weak
During 2022, the total number of dwelling permits issued in Germany fell by 7% to 354,403 units, according to figures from Destatis. The weakness of the residential construction sector continued this year. In the first two months of 2023, dwelling permits dropped sharply by 23.4% to 44,219 units as compared to 57,713 units in the same period last year.
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 3.8% y-o-y to 360,578 units in 2019, by 2.2% to 368,400 units in 2020, and by another 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.
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 43.08 million units by 2022, 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. Though 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 has been repeatedly extended due to the ongoing civil war in Syria.
As the situation normalizes, refugees in Germany have been rising sharply again. During 2022, Germany received a total of 244,132 asylum applications, up by about 28% from 190,816 applications 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.
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 February 2023, the average interest rate for new housing loans was 3.79%, sharply up from 1.45% a year earlier and 1.17% two years ago, according to Deutsche Bundesbank. Over the same period:
- Floating rate or initial rate fixation (IRF) up to 1 year: 4.16%, sharply up from 1.86% in February 2022 and 1.73% in February 2021
- IRF 1-5 years: 3.99%, up from 1.45% a year earlier and 1.28% two years ago
- IRF 5-10 years: 3.6%, up from 1.29% in the previous year and 1.04% two years ago
- IRF over 10 years: 3.74%, up from just 1.48% in the previous year and 1.14% 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 46% of the country’s GDP in 2022 - an unusually low level for a developed economy, a huge plunge from 82.2% of GDP in 1998. During 2022, outstanding housing loans amounted to €1.77 trillion (US$1.96 trillion), up by 5.7% from a year earlier, according to the Deutsche Bundesbank.
However, new housing loans fell sharply by 51.8% to €24.79 billion (US$27.36 billion) in the first two months of 2023 as compared to €51.38 billion (US$56.71 billion) in the same period last year, amidst the recent surge in interest rates. Over the same period:
- New housing loans with IRF of up to 1 year: €4.34 billion (US$4.79 billion), down by 9.5% from a year earlier
- New loans with IRF 1-5 years: €2.4 billion (US$2.65 billion), down sharply by 27.4% a year earlier
- New loans with IRF 5-10 years: €8.76 billion (US$9.67 billion), down sharply by 51.3% from the previous year
- New housing loans with IRF over 10 years: €9.29 billion (US$10.25 billion), down by a huge 63.3% 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.