Housing: Rents will rise sharply in 2024 – building permits are on the decline

A recovery in the tense housing market in many German cities is not in sight. Rents have also risen sharply this year – but at the same time building permits have plummeted.

On average, rents rose by around four percent in both existing and new buildings, as an analysis by the German Institute for Economic Research (DIW) shows. Since 2010, net rents have increased by a total of 64 percent.

According to DIW, purchase prices continued to fall on average in 2024. However, there are signs of a change here, according to the institute, which has evaluated data on purchase and rental transactions from the real estate association IVD in more than 150 German cities. Small towns with a few thousand inhabitants up to metropolises were analyzed.

Michaela Engelmeier, CEO of the German Social Association, sees the figures as evidence of a housing market that is out of balance. “It is an unbearable situation that high rents are becoming a poverty trap for more and more people in Germany,” she said. Limiting rent increases and more social housing construction are therefore necessary.

Apartments remain a scarce commodity in large cities

It is foreseeable that free apartments – especially in large cities – will remain a scarce commodity, as the downward trend in building permits continues. According to the Federal Statistical Office, a total of 175,800 apartments were approved from January to October – almost a fifth (19.5 percent) less than in the same period last year. The federal government’s annual target of 400,000 new apartments is now a long way off.

The approvals are an important indicator with regard to the housing shortage in cities: what is not approved will not be built later. But housing construction is in crisis following a rise in interest rates and high construction costs.

Based on a survey from autumn, the German Chamber of Commerce and Industry (DIHK) sees slight signs of recovery. But: “Overall, the business situation in the construction industry remains far behind the pre-Corona years and the long-term average,” said DIHK economic analyst Volker Treier.

Purchase prices have fallen significantly

The situation has recently improved somewhat for people who can afford to buy a property: building plots, homes and condominiums are on average five percent cheaper than in 2023.

Compared to their peak in 2022 during the real estate boom, prices for single-family homes fell particularly sharply (by a good eight percent), followed by building plots and condominiums, wrote the DIW. The price correction for real estate and building land was strongest in the big cities: here prices fell by an average of 13 percent, and for single-family homes in medium locations by as much as 16 percent.

Despite the significant declines, building land, single-family homes and terraced houses are still around twice as expensive on a national average as they were before the boom began in 2010, emphasizes the DIW. For condominiums it is 117 percent.

Since the middle of the year, purchase prices have risen again, write DIW economists Konstantin Kholodilin and Malte Rieth. The reason for this is probably the recent fall in loan interest rates and the high demand for living space from a growing population.

“The falling prices in the meantime cannot hide the fact that the real problem of the housing shortage continues,” says Rieth. Fewer than 300,000 new apartments would be built in 2023, and forecasts for this year offer little hope. “The new federal government must therefore urgently put it on its agenda to counteract this through public construction and by simplifying procedures and regulations.”

And what are politicians doing?

The fact that it is unclear where the journey is headed due to the new Bundestag election is causing uncertainty – especially when it comes to tenant protection. The cabinet has decided to lower the cap for rent increases in tense housing markets from 15 percent to 11 percent, as well as an obligation to show the furnishing surcharge in rental agreements for furnished apartments. However, it is more than questionable whether there will be a majority in the Bundestag before the new elections on February 23rd.

The same applies to the extension and tightening of the rent cap until the end of 2029, which the cabinet recently decided on. Where the rent cap introduced in 2015 applies, the rent when re-letting existing apartments may only be increased to the level of the local reference rent plus ten percent.

The Greens and the SPD want to prevent this instrument for tenant protection from being no longer available after December 31, 2025. The FDP does not want to take part in this, and the Union would only like to deal with the question of how a new version of the rent cap still makes sense for a transitional period after the election.