German Rental and Real Estate Market Outlook for 2024
Experts forecast a sharp increase in rental prices amidst high immigration and a challenging real estate market in Germany for 2024.
Alex Carter
- 2023-12-28
- Updated 12:21 AM ET
(NewsNibs) - The German rental market is expected to experience continued growth in 2024, with rental prices predicted to rise significantly due to a combination of housing shortages and increased immigration. This trend was evident in the third quarter when the eight largest German cities saw rental costs climb by 8.4% over the same period the previous year. Additionally, cities such as Mannheim, Bonn, Essen, and Wuppertal registered significant increases. Rural areas and other urban spaces, while also experiencing growth, had a more modest increase of around 4% year-over-year. Heightened by record immigration in 2022, the demand for housing has intensified, leading many individuals to opt for rentals, especially as Germany continues to have one of the EU's highest percentages of renters at 47%.
Challenged Real Estate Market Conditions
Conversely, real estate prices are expected to decline, particularly for poorly energy-efficient properties. Uncertainties surrounding the Heating Act and a response to current energy challenges have exerted additional price pressure, notably on least efficient properties. This has been evidenced by substantial price differentiation, where the lowest energy efficiency class H properties declined by an average of 14% in 2023 compared to the previous year, and the highest efficiency class A+ properties by only 1%. Despite this, key interest rate decreases in the new year could stem the real estate market price correction. The Association of German Pfandbrief Banks anticipates the peak of the real estate crisis to occur in the following year, with expectations of further price declines in the coming quarters. It's noteworthy that since mid-2022, property prices have fallen more than ten percent from the prior year, a stark contrast to the period starting in 2010 when the price level had roughly doubled.
Potential Stabilization and Affordability Improvement
Financial experts are nonetheless cautiously optimistic about the potential stabilization of the real estate market. If the European Central Bank (ECB) cuts key interest rates in 2024 due to falling inflation, real estate prices might stabilize. Such a move would likely lead to improved affordability of residential property, as anticipated by the Landesbank Helaba, who projects a rise in real wages and lower financing interest rates. Furthermore, DZ Bank foresees property price corrections slowing down and potentially ending as interest rates drop, with an expected year-average price decrease of only 0.5 to 2.5 percent. The recent dips in construction loan interest rates signal the peak of financing costs may have passed, offering savings for buyers and contributing to a brighter outlook for purchasing property in 2024.
The German market is thus poised at a crossroads going into 2024. Rental prices are set to rise in response to demand, while property prices face downward pressure, with energy efficiency becoming a significant factor in property valuation. However, possible ECB rate cuts and resultant lower credit interest rates could offer relief to both sectors, heralding a potentially positive shift in the market dynamics.