German housing prices set to rise as market remains under pressure

The price of flats and houses in Germany continues to increase despite the economic crisis and after a significant fall in prices in recent years, according to real estate specialists and a series of reports.

Meanwhile affordable housing remains in short supply, particularly in urban areas, and pressure on rents remains high.

Tenants and buyers can expect little in the way of short-term relief as construction costs and interest rates have risen and the price of flats and houses is likely to further increase in 2026, said Michael Voigtländer, real estate expert at the German Economic Institute (IW). "I expect a moderate increase of 3% to 4% but not as rapid as in the 2010s," he said.

The economic crisis, and associated job cuts, is also dampening the property market - but other factors are also driving rising rents and purchase prices.

A growing number of people are living alone, driving up demand for living space regardless of population size, said Carsten Brzeski, chief economist at ING Bank. "The average household size is falling continuously and currently stands at 2.0 people."

The rate was 2.3 people in 1991 but people are starting families later and the birth rate is falling, trends that are likely to continue.

Urbanization is also contributing to Germany's housing shortage. While some 1.7 million flats stand vacant nationwide, especially in rural areas, the market in metropolitan areas is highly competitive, said Empirica, a research and consulting firm. Cities attract tens of thousands of young people every year, according to figures from Empirica Regio, partly drawn by job opportunities.

These trends are driving up rents which increased by 4% nationwide in 2025, according to a study by the German Institute for Economic Research (DIW). However, they rose by up to 8% in the nation's large cities.

It is becoming more and more expensive to buy a home in Germany. But a reduction in the real estate transfer tax, which ranges between 3.5% and 6.5% depending on the federal state, could help, said IW expert Voigtländer.

The high costs of land registry entry and notary fees also deter many people from building or buying property.

The average tenant household has a net worth of €22,300 ($26,200), said Voigtländer at an event organized by the estate agent von Poll Immobilien. "It is becoming increasingly elitist to buy your own home," he said, though this could help to ease the pressure on cities as people are willing to move a little further out to buy their own home.

The German population continues to grow, reaching 83.6 million people in 2024. While people have long predicted this will contract, immigration is growing, with spikes in 2015 when some 1 million refugees came to the nation, and following Russia's invasion of Ukraine in 2022.

Rising interest rates

For months, construction interest rates have been at an elevated level of around 3.7% for months and this is set to remain stable or rise slightly.

Oliver Kohnen, managing director at Baufi24, expects interest rates to reach between 3.5% and 4.0% in the first half of 2026.

Rising government debt is putting upward pressure on interest rates.
And as new construction stalls, fewer apartments are available, especially in cities, in turn increasing pressure on rents and purchase prices.

The situation could worsen as IW forecasts around 235,000 homes were built in 2025 and 215,000 are to be constructed in 2026, amid a decline in building permits in previous years. However, more building permits are set to be issued.

The worst of the crisis is over, says Sebastian Dullien, scientific director of the IMK Institute of the Hans Böckler Foundation, though the situation is set to remain challenging. He said the nation needs some 320,000 new homes each year.

Rising wages for many employees also imply brisk demand for real estate, as do large inheritances. The tax authorities recorded a record level of inheritance and gift tax in 2024.