Not slowed down: rents are likely to continue to rise

Rents should continue to rise in the coming year, but perhaps not as strongly as this year – at least in very expensive locations. What could reverse the trend?

For years, rental prices have only known one direction: up

Dhe German Tenants Association warns of rising rents in the new year. “In our opinion, there are no factors that should slow down the rise in rents,” said director Lukas Siebenkotten. There was still a gap between supply and demand, especially in large cities, metropolitan areas and university towns. The result is strong growth in asking rents. “It is only conceivable that the price increase will slow down in the extremely high-priced cities, since rents are no longer affordable here.”

The high asking and re-letting rents would now also affect the rents in existing tenancies, said Siebenkotten. “The local comparable rent is expected to increase by 3 to 5 percent in the cities.”

At least when it comes to ancillary costs, the tenants’ association does not expect any significant increases in 2019. According to the latest data for 2016, tenants paid an average of just under 2.20 euros per square meter for the “second rent” including heating costs. For an 80 square meter apartment, this means that there are additional costs of 176 euros per month. Almost half is used for heating. Only households that heat with oil should expect significant surcharges, said Siebenkotten.

No end to the boom

Even after years of real estate boom, the rise in rents has recently continued unchecked. This is shown by an evaluation by the Hamburg Institute for Urban, Regional and Housing Research (GEWOS) for the German Press Agency. The asking rents climbed to a national average of a good 7 euros per square meter in the third quarter. That is an increase of 3.9 percent within a year.

Contrary to some forecasts, there is no end to the boom. On the contrary: “Compared to the same period in the previous year, the rent trend has become more dynamic,” said GEWOS managing director Carolin Wandzik. In the third quarter of 2017, the increase in asking rents was slightly lower at 3.6 percent.

Rents rose particularly strongly in the seven largest German cities, including Berlin, Hamburg and Munich. On average, they grew there by 6.4 percent to just under 12 euros per square meter cold. The study examined apartments each with a size of 80 square meters and a construction age of 30 years in a medium location and with the usual furnishings, which were offered on the Immobilienscout24 online portal.

The momentum could decrease in 2019

As early as 2017 and in the first half of the year, rents for new rentals across Germany had risen faster than inflation, as data from the Federal Ministry of the Interior had shown. In the case of existing rental contracts that lag behind the real estate market, however, the increases were lower: in 2017, existing rents climbed by 1.6 percent compared to the previous year, according to the real estate association GdW.

Constantly rising rents are not unusual in themselves, at least in the cities, says Michael Voigtländer, real estate expert at the Institut der deutschen Wirtschaft (IW). Because that is where most of the jobs for highly qualified people would be created and incomes would tend to grow. The extent of the rent increases is extraordinary.

The momentum could decrease in 2019. Because immigration from abroad is declining, and politics is regulating more and more – for example with a tightened rent brake and less scope for owners to pass modernizations on to rent. “In some already expensive residential areas, rents are likely to rise more slowly,” said Voigtländer. In the surrounding areas of the cities it could become significantly more expensive because people would no longer find apartments in metropolises.

In metropolises no law of nature urged

The main reason is the lack of housing. In 2019, there is only some relief in sight. According to the construction industry, up to 320,000 new apartments are likely to be built in the new year, more than in 2017, but not enough: according to politicians and the real estate industry, 350,000 to 400,000 new apartments are needed annually to meet demand.

In the real estate shortage, construction companies and craftsmen can hardly keep up – also because there is a lack of skilled workers. The shortage of plumbers, plumbing and heating tradespeople is slowing down residential construction, explained the KfW development bank. Even building in gaps or adding extra flats would come up against limits in densely populated cities like Munich or Frankfurt. The scarcity is causing construction costs to rise sharply, which later affects the rent.

But what would curb the rise in rents in the cities? About a reversal of the strong currents in the metropolitan areas, said IW expert Voigtländer. The urge into the metropolises is not a natural law, but is currently unbroken. Even low-income groups wanted to go to the city and would accept higher housing costs in return. “A return to the little house in the country is not to be seen.”