Housing Market Overview

H2 2022

Trend reversal on the housing
market – rents rise more strongly than purchase prices

March 09, 2023
The population is growing at an above-average rate and increasing the pressure on the housing market

The real increase in demand for housing is faced with a sharp decline in housing construction, causing the gap between supply and demand in the housing market to continue to widen over the medium term.

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: there was a net influx (i.e. more immigration than emigration) of 1.046 million foreign nationals between January and June last year. In fact, net migration is likely to reach 1.5 million over the full year 2022, the highest figure recorded since German reunification. This growth is mainly due to the influx of Ukrainian citizens but also to an overall invigoration of international inward migration to Germany, which has returned to pre-pandemic levels.

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. This not only increases demand in the rental markets, but exacerbates demand in the already tense regional housing markets. These shifts will continue until a downward price adjustment makes housing more affordable again and/or the rental price growth overtakes the hike in ownership costs.

The third long-term driver on the demand side is the change in demographic structure. There are a number of discernible demographic trends which can be attributed mainly to the increased ageing of the population. Firstly, there will be a further rise in the proportion of smaller and older households over the medium term and, secondly, there will be an increase in the total number of households. The ageing of the population also has a significant influence on the development of the housing market. Because the different age groups represent a number of occupier groups which vary in terms of their lifestyles, requirements, income situations and housing preferences, their demand for housing is correspondingly diverse. A demographic structural shift has major impacts on the housing market, especially if there is a significant widening of the gap between the current demand for housing and existing supply of residential space. This discrepancy particularly relates to the size of residential units both in demand and availability to the market, but can also affect downstream qualitative issues such as fit-out. This mismatch is apparent in the German market and tends to drive additional demand for specific types of housing.

Decline in new housing construction affects housing completions with a time lag

The construction industry was already struggling with enormous hikes in building costs in 2021, mainly due to the pandemic, and consequently there have been adjustments to global supply chains and additional burdens such as a sharp rise in borrowing costs in 2022. The shift in underlying conditions has resulted in a significant downturn in new business volumes. This decline in demand in the construction industry is expected to result in a sectoral recession in 2023.

Whilst these developments have already impacted the number of residential new-build completions in 2022, more serious consequences resulting from the downturn in completion volumes are to be expected, in this case after a certain time lag. The number of newly-built homes could fall below 250,000 this year. The slump in new business volumes (by up to 40% in the construction industry) has led to a slight easing of tension in the case of increasing construction costs. The freed-up capacities have taken some pressure off the growth in construction costs. For example, labour costs in the housing construction industry have been declining recently. The costs of materials are also rising at a slower rate.

Nonetheless, there are several reasons to suggest that construction costs will remain at a high level over the long term.

  1. The energy-efficient refurbishment of the existing residential stock is one of the central political pillars in terms of achieving climate targets. The implementation of the European Green Deal alone requires a near doubling of the modernisation rate (from around 1.0% to greater than 2.0% - 2.5%). This will ensure that capacity utilisation remains high in the construction industry.
  2. In view of the continually significant housing shortfall and declining new-build completions, there are potential catch-up effects in the housing construction industry.
  3. The demand for construction services is faced with a persistent shortage of labour in the construction industry which is likely to be the critical capacity-limiting factor in this industry over the medium term. The increasing age-related retirement of experienced workers from the labour market is exacerbating the existing shortage of new young skilled staff, resulting in a further lack of resources. This is likely to keep labour costs at a high level over the long term.
  4. The increasing energy requirements in housing construction and renovations also require a significant input in terms of specialised building materials, which will also keep construction material costs high. A temporary easing in construction costs is expected during 2023.
Asking rents in the second half of 2022 much higher than the previous year

After years of significantly stronger growth in purchase prices for owner-occupier homes than in rental prices in the Big 8 cities*, there was a reversal of trend in the second half of 2022; asking rents grew faster than advertised purchase prices. In the eight cities under review, asking rents rose in the second half of the year by an average of 6.3% compared to the previous year, whilst purchase prices rose by just 1.6% over the same period.

Demand for rental housing over the last six months has been driven by the enormous population growth as well as a low level of construction activity. Due to the current underlying conditions in terms of residential construction (high inflation, increasing interest rates, increasing construction costs), no improvement in the situation is expected in the short to medium term, and the gap between the supply and demand of residential space will continue to widen over the medium term.

By far the most significant rental price increases over the second half of 2022 have been in Berlin, where the monthly median rent rose by 15.5% year-on-year to €16.00/sqm. The rental markets in Leipzig (+8.9%) and Hamburg (+7.0%) were also very dynamic. By contrast, there was below-average growth in Stuttgart (+1.7%) and Munich (+2.4%). Despite lower growth over the second half of 2022, Munich’s rental market remains the most expensive amongst the Big 8 cities with a monthly median rent of €21.40/sqm.

There is a similar picture in terms of the prime rental price segment: the average prime rent rose by 6.2% year-on-year. This is significantly above the five-year average of +3.5%. Despite stagnation of the monthly prime rent at €30.00/sqm, Munich remains the market leader amongst the major cities. As already observed for total rents, the markets in Leipzig (+11.1%) and Berlin (+14.6%) showed an equally dynamic development in the prime segment.

Rents in the new-build segment also grew by 3.8% over the course of last year. In particular, the cities of Hamburg (+8.2%) and Leipzig (+9.1%) were well above average amongst those under review. By contrast, monthly rents for newly-built homes in Cologne fell by -5.0% year-on-year to their current level of €15.20/sqm.

Of particular note is the discrepancy in the development of rents in the various cities compared to their surrounding areas. Whilst asking rents within the city limits increased by 6.2%, rental prices for apartments within a 30-minute drive of a city have fallen by 5.8% compared to the previous year. In areas exceeding a 30-minute journey time, rents have fallen by 7.5%. This development is likely to be a correction of the significant rental price growth over recent years.

Excluding the Big 8 property markets, the other independent cities have seen their rents rise by 4.4%, which is slightly below the five-year average (+5.1% p.a.). In the remaining German districts, the price increase of 6.0% is just slightly below that in the major cities, but is well above the five-year average (+4.4% p.a.).

*Berlin, Hamburg, Munich, Cologne, Frankfurt, Düsseldorf, Stuttgart, Leipzig

Rising interest rates and high inflation have subdued demand in the owner-occupier market

After more than a decade of rising property prices, high demand and favourable interest rates in the owner-occupier market, the picture was somewhat different over the second half of last year; here, increasing interest rates, high inflation and a sharp rise in construction costs have resulted in a significant fall in demand. Demand has been shifting, primarily to the rental housing market. Stagnating prices for residential property and the hike in rental prices brought about a reversal of trend in the property market in the second half of 2022. In the eight cities under review*, there was a noticeable negative development (average of -3.1% in the Big 8) in the first six months of the year.

A closer look at the second half of the year shows that the only increase in purchase prices compared to the first half of 2022 was in Berlin (+2.4%). The main reason for the current fall in prices in the owner-occupier market is the significant increase in financing interest rates over the course of the year.

However, in a year-on-year comparison, the development of purchase prices is still positive with an average growth of 1.6%, but this is significantly below the five-year average. The group of cities with negative year-on-year growth expanded to include Cologne (-2.2%), Frankfurt (-0.4%) and Munich (-2.1%). By contrast, purchase prices in Stuttgart remained at a stable level of €5,330/sqm.

There was more purchase price growth in the prime segment of the Big 8 cities. Prime purchase prices rose by 2.7% year-on-year. However, this is significantly below the five-year average of +7.0% p.a. Price momentum slowed significantly during the second half of 2022. In Munich, prices fell by 7.8% to around €14,130/sqm over the past year. By contrast, purchase prices in the prime segment in Hamburg (+10.7%) and Leipzig (+8.8%) grew at rates significantly above the five-year average.

Purchase prices in the new-build segment continued to rise over the second half of 2022. The Big 8 cities registered positive growth of 12.4% compared to the previous year. The purchase price for new-build in Leipzig exceeded €5,000/sqm for the first time during the second half of 2022, bringing the current purchase price to around €5,260/sqm which is a rise of 11.2% compared to the previous year.

Price development tends to vary outside the major cities. While purchase prices in the independent cities rose by just 0.6% year-on-year, the remaining German districts recorded more positive growth of 6.2%. In a year-on-year comparison, both the independent cities and the other German districts performed at levels significantly below the five-year average (+10.3% and +9.9%, respectively).

*Berlin, Hamburg, Munich, Cologne, Frankfurt, Düsseldorf, Stuttgart, Leipzig


Dr. Sören Gröbel, Director Research, Berlin

Sandra Baumgarten, Senior Research Analyst

Contact us

Our Residential Market contacts:

Michael Bender, Head of Residential Germany

Ralf Kemper, Head of Valuation & Transaction Advisory Germany
Roman Heidrich, Lead Director Valuation & Transaction Advisory, Berlin
Sebastian Grimm, Lead Director Valuation & Transaction Advisory, Frankfurt

Helge Scheunemann, Head of Research Germany


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