Whenever the subject of housing comes up in the media or in politics, the discussion will often turn to the fast rise in rents over the past years. However, this angle fails to take into account that wages and salaries have gone up as well—and outpaced the rent growth in large parts of Germany, as a recent survey conducted by the IW German Economic Institute in Cologne found. The latter suggests that rents have become more affordable in roughly two of every three German counties and corporate cities between 2013 and 2017.1
For the sake of its survey, the IW Economic Institute compared the developments of median wages with rent rates in all of the 401 counties and corporate cities. Assuming you are an employee spending 26 percent of your net income on your net rent—which would equal the German mean—then you would be able to afford a larger home in most regions of Germany than you did five years ago.
Wage Increases Outpaced Rent Growth even in the Metropolises
These findings apply not just to rural areas or small towns, but even to some of the metropolises. Employees in Hamburg, for example, were able to afford an average of 55.5 square metres in residential accommodation in 2017, up from 53.1 square metres in 2013 or an increase by 4.6 percent. Analogously, the affordable residential footprint increased by 2.0 percent in Frankfurt am Main, by 1.4 percent in Cologne and by 1.2 percent in Düsseldorf. In Munich, by contrast, the costs of renting your home increased 6.1 percent faster than the income trend. Affordability also declined in Berlin, but only marginally so. The average apartment size that employees can afford in the German capital dropped from 59.5 square metres in 2013 down to just 59 square metres by 2017.
But generally speaking, the survey findings are at odds with the widespread opinion that the affordability of housing in Germany is steadily deteriorating and rents in conurbations in particular have become intolerably high. Although it is true that rents went up over the past five years, the income trend stayed abreast of their growth, to say the least.
Good News for Buy-to-Let Investors
Nevertheless, the body politic keeps its focus firmly trained on the landlord-tenant law, cases in point being the recent decisions to tighten rent control legislation (the so-called “Rent Freeze”) and to curtail the modernisation allocation.2 But there is reason to believe that the main drivers behind the rental growth are actually the housing shortage and the sluggish pace of housing construction. Accordingly, economists like Lars Feld, one of the members of the German Council of Economic Experts, continues to assume that the combination of a still low supply with a persistently strong demand will keep driving up rents, especially in the country’s conurbations.3
Even now, it is safe to say that 2018 saw brisk rent growth in the metro regions. An analysis of the Immowelt.de real estate portal revealed, according to the Frankfurter Allgemeine Zeitung, that asking rents in Berlin climbed by twelve percent during the first nine months, compared to the period year period. Asking rents also rose in the country’s other metropolises by at least three percent, according to the analysis.
While tenants will take a bleak view of the development, buy-to-let investors will consider the upward trend good news along with the prospective growth upside generated by the increased affordability. In other words, owners of residential property may keep looking forward to a robust rate of return and a stable price trend.