Housing Market Overview
Trend reversal on the housing
market – rents rise more strongly than purchase prices
Recent increase in pressure in the Berlin housing market
Rising interest rates and increased equity requirements are making it more difficult to buy property, with subsequent evasive movements into the rental market. As a result, prices in the rental market rose significantly over the first half of 2022. For the first time, the growth in rental prices is above the increase in purchase prices in the Berlin housing market.
The current monthly median rent is €16.00/sqm and has risen by 15.5% year-on-year. A principal driver of this growth is the cessation of the rental price cap. However, the current economic situation is also causing prices to rise in the rental market. There is a similar development in the prime segment, in which rents also picked up enormous momentum over the course of last year. With an annual growth of 14.6%, Berlin is well above the average of the Big 8 cities (+6.2%).
The owner-occupier market in Berlin, on the other hand, has experienced less growth over the second half of the year. The trend reversal becomes clear in a medium-term comparison. Purchase prices in Berlin have risen by an average of 9.6% p.a. over the last five years, while last year’s growth was just 6.5% year-on-year. Similar growth can be seen in the prices of newly-built homes. Compared to the previous year, the purchase price for a newly-built home rose by around 16.2%, which is well above the five-year average (+9.1%).
Berlin’s population continued to grow steadily over the second half of 2022. This is mainly due to the influx of Ukrainian citizens, increasing the demand for housing which is already in short supply. With around 12% fewer residential units on offer compared to the first half of the year, the existing excess demand is further exacerbated by the lack of available space.
Dynamic growth in the rental market but stagnating prices in the owner-occupier market
The general trend reversal is clearly evident in the Düsseldorf housing market: rents are rising and purchase prices are stagnating or falling. However, there is one exception, purchase prices in the new-build segment.
With growth of 16.7% compared to the previous year, Düsseldorf recorded the strongest purchase price rise in the new-build segment amongst the Big 8 cities, ahead of Berlin (+16.2%) and Cologne (+16.1%). The current purchase price not only reached a peak in the second half of the year, but was also well above €8,000 for the first time, at €8,400/sqm.
A different picture is emerging in the prime segment. There, the prime purchase price is currently €8,450/sqm after a fall of 5.1% compared to the previous year. Only Munich (-7.8%) performed worse on a city-by-city comparison. There was stagnation or a lateral movement of median purchase prices over the second half of 2022. With marginal year-on-year growth of 0.2%, the purchase price rose to its current level of €5,070/sqm. The annual growth rate for median purchase prices is significantly below the five-year average of 8.2%.
By contrast, the residential rental market developed much more positively. With monthly rental prices growing by 6.3% compared to the previous year, to reach a level of €12.75/sqm over the second half of the year. Monthly prime rents exceeded €19.00/sqm for the first time; at €19.10/sqm, it also increased by 6.3% compared to the previous year. This growth rate is also significantly higher than the five-year average of 2.5% p.a. Rents increased by 3.2% year-on-year in the new-build segment, with the current monthly rent for a newly-built home now €16.10/sqm.
360 apartments will be completed by the end of 2024 in the new ‘Wohnen im Hochfeld’ residential neighbourhood, some of which will comprise publicly subsidised and price-controlled housing. The first development phase has already been completed. Another exciting project is the Glasmacherviertel, a mix of apartments and single-family houses with up to 1,700 residential units.
Frankfurt am Main
Huge increases in both purchase prices for newly-built homes and prime rents in the second half of the year
Purchase prices in the owner-occupier market fell in the second half of 2022, for the first time after years of growth. The only exception here was the new-build segment. With negative growth of 0.4%, the median purchase price fell to €6,870/sqm in the second half of the year. Alongside Cologne (-2.2%) and Munich (-2.1%), Frankfurt is the third Big 8 city to show negative growth compared to the previous year. The situation is only marginally better in the prime segment. Prime purchase prices have risen by just 0.5% compared to the previous year. The current prime purchase price is now €10,170/sqm. The exception mentioned above is the new-build segment in Frankfurt which experienced a year-on-year increase of 12.1%. The current purchase price for a newly-built home is €8,500/sqm.
By contrast, the rental market showed a more consistent picture: median rents, monthly prime rents and rents for newly-built homes showed positive year-on-year growth across the board. The monthly median rent rose by 3.9% to €16.10/sqm. Prime rents reached a new high of €24.55/sqm. The prime rent grew by 7.4% compared to the previous year. This growth is twice the five-year average of +3.1% p.a. There was a rental price increase of 5.1% in newly-built homes, to a new high of €18.60/sqm. Amongst the Big 8 cities, only Leipzig (+9.1%) and Hamburg (+8.2%) experienced greater rental price growth in the new-build segment.
The Frankfurt housing market is also currently suffering from a housing shortage. The new Frankfurt Heddernheim residential district is a recycling project comprising 4.5 ha which is being made available for social housing. Both the City of Frankfurt and the State of Hesse are subsidising the construction of the apartments on the site of the former Diehl Aerospace GmbH plant with a total investment of approximately €20 million. The mixed-use Schönhof district will be built on a former Siemens site, where around 2,100 residential units will be constructed, including 670 subsidised apartments. The projects also include plans for both children’s daycare facilities and schools.
Increasing dynamism in the housing market in the second half of the year
The Hamburg housing market experienced a price hike in the second half of the year. Despite inflation, increased interest rates and falling supply, both rental and purchase prices increased year-on-year.
The current monthly rent rose by 7.0% over the second half of 2022 to reach a new high of €14.50/sqm. This is significantly above the five-year average (+3.3%). By comparison to the other Big 8 cities, Hamburg recorded the most significant year-on-year rental price growth after Berlin (+15.5%) and Leipzig (+8.9%). In particular, rents have risen by around 8.2% in the new-build segment. Only Leipzig (+9.1%) was able to show stronger growth amongst the Big 8 cities. The monthly prime rent rose to €22.60/sqm, corresponding to a year-on-year growth of 7.6%.
There was a similar picture in the owner-occupier market. Although current annual growth (+4.8%) is below the five-year average (+9.1%), there were particularly strong rises in both prime and new-build purchase prices during the second half of the year. In the prime segment, the purchase price reached a new high of around €10,850/sqm, which is a year-on-year increase of 10.7%, putting Hamburg well above the average of +2.7% amongst the Big 8 cities. A new record was also set in the new-build segment. Here, the current price for a newly-built home rose by 11.6% to €7,800/sqm.
In the subsidised housing sector, the City of Hamburg approved an increase in funding to continue its affordable housing programme. 2,430 publicly subsidised apartments were completed over the last year. However, housing remains scarce in the city. The medium scenario shows that some 7,238 additional apartments are required annually.
Significant increase in purchase prices for newly-built homes and record prime rents
The Cologne housing market showed positive growth in both rental and purchase prices in the second half of 2022. There was no clear trend reversal as seen in the other Big 8 cities.
The monthly median rent in Cologne has risen to a new record level of €14.00/sqm. This equates to a growth of 4.9% compared to the previous year, one percentage point higher than the five-year average (+3.9% p.a.). There is a similar positive development in the prime segment in which the monthly prime rent rose by 6.1% p.a. to €21.65/sqm over the second half of the year. The picture is somewhat different in the case of newly-built homes. With a year-on-year fall of 5.0%, Cologne is the only city in the Big 8 experiencing a downturn in rents for newly-built homes . The current monthly rent in the new-build segment is €15.20/sqm.
There has also been a negative development in median purchase prices in the owner-occupier market. With a decline of 2.2% compared to the previous year, the median purchase price fell to well below €5,000/sqm. This is currently at €4,890/sqm. By contrast, there was price growth in the prime segment over the second half of 2022. The prime purchase price rose by 7.3% to the current level of €7,750/sqm. In the new-build segment, the purchase price also increased over the course of the year. There was annual growth of 16.1% to €7,410/sqm, putting Cologne just behind Düsseldorf (+16.7%) and Berlin (+16.2%) amongst the Big 8 cities.
One exciting project in the Cologne housing market is the Deutzer Hafen neighbourhood development. The first partial local development plan was recently approved by the City of Cologne. In the next few years, around 3,000 apartments will be constructed to help meet the demand for housing. A new residential complex with up to 3,400 apartments is also planned for Parkstadt Süd. Up to 30% of these will be publicly subsidised housing.
Dynamic growth in the Leipzig housing market continues in the second half of 2022
Increased interest rates, continually high costs of materials and persistently high inflation are keeping the overall housing market on its toes and causing a trend reversal in terms of prices except in Leipzig where both the letting and owner-occupier markets developed positively over the second half of 2022.
The monthly median rent rose by 8.9% in the second half of the year to €8.60/sqm. This means that Leipzig is still the cheapest city amongst the Big 8. Leipzig experienced the second highest year-on-year growth rate after Berlin (+15.5%). In the prime segment, there is a new monthly prime rent of €12.50/sqm. This was a year-on-year increase of 11.1% and is significantly above the five-year average (4.6% p.a.). In the new-build segment, rents also developed positively with 9.1% growth compared to the previous year to a new level of €12.55/sqm.
The Leipzig owner-occupier market also reported positive growth across the board in the second half of 2022. The median purchase price rose by 6.1% compared to the previous year, well above the average for the Big 8 cities (1.6%). The current purchase price in Leipzig is €3,290/sqm. Prime purchase prices also increased in the second six months with a year-on-year growth rate of 8.8%. The current prime purchase price is now €5,430/sqm. The purchase price for a newly-built home is €5,260/sqm. This is a year-on-year increase of 11.2% and is well above the five-year average (+7.5% p.a.).
Several new buildings of up to five storeys in height will be built on a brownfield site in the district of Möckern. Up to 160 apartments will be built here over the next few years, some of which will be price-controlled. In the city centre, a new neighbourhood with 3,000 apartments and children’s daycare facilities and schools will be built on the former Bayerischer Bahnhof railway site.
Moderate increase in rental prices but falling purchase prices
Even with Munich remaining the most expensive rental market amongst the Big 8 cities in the second half of 2022, a different trend was emerging in the owner-occupier market in which purchase prices fell or stagnated compared to the previous year.
With a year-on-year downturn of 2.2%, purchase prices continued to fall over the second half of the year to below €10,000/sqm. The current average purchase price is €9,550/sqm. The prime segment also lost considerable momentum. Munich recorded the greatest fall amongst the Big 8 cities of 7.8%; the prime purchase price had risen by 10.8% p.a. over the previous five years. The development of purchase prices in the new-build segment was completely different. Purchase prices rose to a new high of over €12,300/sqm, an increase of 12.5% compared to the previous year.
The Munich rental market was characterised by moderate rental price growth over the second half of the year. Asking rents had risen by an average of 3.6% p.a. over the last five years. However, current figures show only a marginal increase of 2.4% compared to the previous year. This puts Munich well below the average for the Big 8 cities (+6.3%). The monthly prime rent was unchanged at €30.00/sqm, but Munich remains the front-runner in this category. Rents also rose moderately in the new-build segment. Annual growth (+2.7%) is also below the five-year average (+3.6% p.a.).
To counteract the tense situation in the housing market and meet the demand for affordable housing, the total volume in the ‘Wohnen in München VII’ (Living in Munich VII) municipal housing construction programme has been increased to around €2 billion. One example is the approximately 900 affordable and subsidised apartments which will be built on the site of the former McGraw Barracks over the next few years.
Rental price growth but stagnating purchase prices
The Stuttgart housing market grew over the second half of the year, but the growth in rental and purchase prices is tending to be moderate to stagnating.
The Stuttgart rental market painted a mixed picture in the second half of 2022. The monthly median rent rose by 1.7% compared to the previous year to its current level of €15.25/sqm. This development is significantly below the average of the Big 8 cities (+6.3%) and is the weakest among Germany’s 8 largest housing markets. In the new-build segment, monthly rents are currently €18.25/sqm. This equates to a year-on-year growth of 2.2%, but is significantly below the five-year average (+5.0% p.a.). An exception in the rental market is the prime rent. Compared to the previous year, the monthly prime rent fell (by 2.5%) to its current level of €21.45/sqm.
The median purchase price stagnated in the second half of 2022. The purchase price remained at a plateau of €5,330/sqm. As with prime rental prices, there was negative year-on-year growth in terms of prime purchase prices. After a fall of 0.6%, the current prime purchase price is now €7,750/sqm. In the new-build segment, there was positive growth of 2.7% compared to the previous year. This puts Stuttgart in last place amongst the Big 8 cities and significantly below its own five-year average (8.7% p.a.). The current purchase price for a newly-built home is €8,480/sqm.
The former IBM Campus will be transformed into a new neighbourhood and subsequently renamed. In addition to the modernisation of the monument listed existing buildings, approximately 1,800 residential units will be constructed, 20% of which will be available for publicly subsidised housing.
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.
- 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.
- In view of the continually significant housing shortfall and declining new-build completions, there are potential catch-up effects in the housing construction industry.
- 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.
- 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
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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