Most Googled: Why do Germans prefer renting rather than buying a house?

Welcome back to another iteration of our “Most Googled” series. In this article, we are going to look at why the people of Germany prefer renting over buying their own homes. While many will just assume this is down to the cost of buying being too high in the federal republic, there is actually a historical reason for the Germans' love of renting.

The need for housing after WW2 in Germany

Germany’s housing problems can be traced back to the end of World War II, with the country torn apart by conflict and many people left desperately needing a place to live. With private money lacking to finance the building of private homes, the state quickly stepped in to provide social housing, before slowly withdrawing from the sector. This meant that rents remained cheap for a long time, and so most people were happy to stay in rented accommodation.

This government-built, high-quality supply of social housing laid the foundations for Germany’s preference for renting over buying. Couple this with a lack of subsidies for homeowners, rent stability, and consistently high house prices, and Germany’s historical propensity for renting over buying becomes clear.

Why has a preference for renting persisted?

So how come, 76 years on from World War II, Germans still prefer to rent over buying houses? Well, there are a lot of issues with the housing market in modern Germany, which largely comes down to supply, cost and government intervention.

Studies over the past few years have shown that there aren’t enough houses built in Germany’s big cities to match demand. The lack of supply is exacerbated by a myriad of factors, including a large influx of people into German cities, strict building regulations and a lack of skilled workers in the construction industry. The lack of living space is a big issue in Germany, and the government is under heavy pressure to keep up with demand.

This shortage of housing has a direct effect on costs, and year-on-year house prices continue to skyrocket in Germany. In fact, a recent evaluation by housing website Immoscout24 revealed that the cost of buying a house has risen significantly in the first half of 2021 compared to the second half of 2020. According to the report, house prices for existing dwellings rose by 7,9 percent in the period, with new-build prices rising by 5 percent. The rising cost of living is most notable in big cities like Cologne or Hamburg, where demand is far greater. In Munich, the cost of buying a house is so high that prices are actually stagnating; according to the report, the price for new build houses is at an average of 9.016 euros per square metre.

The cost of buying a house is so expensive in Germany that a single, childless person earning an average income cannot afford to buy an average home in Germany. People earning an average wage will usually have to turn to more rural areas, like those in Saxony and Saxony-Anhalt. Even people earning a salary that puts them on the threshold of the top tax bracket are limited as to where they can buy a house.

Government intervention: Is renting really cheaper?

In Germany, there are rules and regulations in place that prevent landlords from charging too much in terms of rent. One example of such regulations was the Berlin rent cap (Mietendeckel), which was passed into law at the beginning of 2020. The rent cap included a freeze on rents for five years, established upper limits for re-letting and reducing thousands of residents' rent. The move proved wildly popular with renters in the German capital although not so much with landlords. Before the rent cap was declared unconstitutional (and thus void) earlier this year, the cap actually did succeed in driving rents down, although the rental market in the city shrunk significantly.

Despite the rent brake being overturned by the German courts, there are a number of rent controls in place to stop landlords from setting rents too high or increasing rents too much during the tenants stay. Currently, rents are set in accordance with the condition and age of a property and are usually kept in line with other rental prices in the same area. “Rental costs per square metre in Berlin, at a relatively moderate rate, are lower than Frankfurt, Hamburg and lastly Munich, which charges the highest rents. But a comparison of European cities clearly shows how favourable the average rent level is in German cities,” according to Deloitte, an international professional services company.

By the end of 2020, rents had hardly risen compared to house prices. The “Risk-Return-Ranking”, a study by real estate service provider Dr. Lübke & Kelber, revealed that the cost of buying an apartment had risen by as much as 10 percent in 2020. This has contributed to the gap between house prices to rental prices getting further and further apart, essentially making it less financially plausible to buy rather than rent.

Are things going to change?

While house prices in Germany are rising, so are rents. The housing shortage in Germany is reaching a critical point and the government is under pressure to build more affordable social housing. Especially in more affordable German cities, the shortage of housing is leading to rents increasing significantly. More and more Germans have taken to buying in the past 20 years, with statistics from the Federal Statistical Office showing that the proportion of Germans choosing to live in their own home has risen from 40,9 percent in 1998 to 46,5 percent in 2018.

In light of the rising rental prices, “It is more attractive to invest in a residential property than to rent,” said Michael Voigtländer, an economist at the Cologne Institute for Economic Research (IW). According to a study by the IW, it is now more profitable to buy a house in 393 German districts (out of 401) rather than rent. This is largely down to the low interest rates set by the European Central Bank over the past 10 years, which have made it cheaper to take out a mortgage.

See you for the next edition of Most Googled!

So, what do you think? Are people in Germany going to keep renting instead of buying? Or will increasing rents and low interest rates lead to more people buying a home? Whatever the case is, make sure to keep an eye out for the next edition Most Googled! Do you have any pressing questions about Germany that you’d like answered? Leave them in the comments below!