Rising Rental Prices in Major German Cities

A recent analysis by the Institute of the German Economy (IW) in Cologne has revealed a significant increase in rental prices across various German cities. In major urban areas such as Berlin, Essen, and Frankfurt am Main, tenants are facing hikes of at least 8% in new rental contracts.

The IW's housing index indicates that, in the fourth quarter of 2024, nationwide new rental prices rose by 0.9% compared to the previous quarter, marking a 4.7% increase year-over-year. The primary factor driving this surge is the ongoing shortage of available housing, particularly in urban centers and sought-after neighborhoods, as noted by the IW.

According to IW's real estate expert, the current rental market dynamics mean that tenants are paying more due to the scarcity of available properties. He emphasized that the situation is unlikely to improve, as the construction of new housing units is set to remain insufficient throughout 2025.

For those looking to purchase property, the situation is somewhat different. Prices for buying real estate have remained relatively stable compared to the previous year, aided by a slight decrease in interest rates over the last year. However, the affordability of buying has worsened significantly since 2022, leading many potential buyers to hesitate or shift their focus to rental properties, further straining the rental market.

The increase in rental prices becomes even more pronounced when compared to 2022 figures, with multiple cities experiencing jumps of over 10% in new lease agreements. Berlin tops the list with an increase exceeding 22%.

The IW reported that a total of 260,000 new housing units were completed last year, while the federal government had set a target of 400,000 new units annually upon taking office. Projections for 2025 suggest that this number could decline to as low as 230,000, indicating a persistent shortfall in housing supply against actual demand.

Looking ahead, the IW anticipates that property prices are likely to rise in 2025. This forecast is based on the expectation that interest rates will remain stable or may even decrease slightly, barring any significant geopolitical disruptions. Additionally, ongoing wage growth, despite a challenging economic climate, is expected to contribute to increased property prices, as the demand for skilled labor continues to outstrip supply in many sectors.