Germany’s biggest cities will soon see something that seemed impossible not so long ago: The steady increase in rents will grind to a halt— and possibly even start to reverse course. That’s the prediction from Germany’s real estate industry trade association, ZIA, in a report released Tuesday.
Amid a real estate slowdown in Germany’s seven largest cities, ZIA predicts that the cost of new rental contracts will soon slide in Berlin and Munich, and possibly in Hamburg as well. Legally permitted rent increases on existing contracts should follow soon after, and within five years, the cost of buying a home in these cities could drop sharply, although the report does not predict by how much. This drop is guaranteed in Berlin, highly likely in Munich, and possible in Hamburg and Frankfurt, according to the report.
The idea of rents falling in prosperous and fashionable cities sounds like a dream for renters. So are these predictions proof that Germany’s efforts to control rent are finally having an effect?
If they are, ZIA isn’t saying. These predictions are actually based on other factors, which are worth walking through in detail. For a start, they note that a corrective downward trend is already present. In Germany’s Big Seven cities (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart, Dusseldorf), rents rose by 2.6 percent in 2016, on par with the national average that year, and a marked drop from the 3.4 percent rise those cities saw in the previous year. These towns have galloped ahead of the pack in recent years, but now it seems they’ve returned to the fold. Whether this is due to stricter rent laws is unaddressed in the report.
These big-city rents should be stabilized further by a glut of new housing. Germany has around 300,000 new homes somewhere in the pipeline between approval and completion, with much of that happening in the Big Seven cities. These homes, ZIA reasons, will be on the market within the next few years and will be largely up for rent in a country where immigration is set to fall. Already, a feared increase in rents driven by refugees has failed to materialize, and if you subtract new arrivals, Germany’s birth rate remains in the negative. This means that the number of people who need housing is likely to either contract or remain static as the number of homes increases.
This contraction is likely to be felt more strongly in the largest cities because they seem to have lost some of their magnetic pull. Fewer people are moving to Berlin, Hamburg, and Munich from elsewhere in Germany. This is probably because, in a country with high expectations for living standards, younger people are heading instead for cheaper second-rank cities such as Leipzig. Berlin may still exert a strong lure for prospective foreign residents, but over the past five years, the number of German citizens leaving the city has been about the same as the number of German citizens arriving. So while housing stock may increase, the demand may not.
This declining demand for rental homes should have an especially marked effect on property prices overall, albeit not for a year or two. ZIA estimates that in Berlin, Hamburg, and Munich, these could fall by as much as a third within the next five years. These cities have seen phenomenal increases in home prices since 2010: in Hamburg, they rose by 40 percent, by 50 percent in Berlin, while in Munich they rose a remarkable 75 percent. If the tide turns, it will do so from a very high crest—one that only avoided bubble conditions because of the more realistic prices outside the Big Seven cities.
The downward pressure on rents could serve to scare away that great bogeyman of Germany’s major cities: the absentee landlord. As expert Harald Simons commented on reading the report: “For Berlin, the party’s over.” If Berlin, Munich, and Hamburg truly see the end of this phase, there will probably be a fair amount of relief. For some parties, no one really wants an invitation.