Germany’s housing market is being redrawn by connectivity

The national headline looks reassuring. Average residential property prices across Germany are forecast to rise from €3,024 per square metre in 2025 to €4,092 by 2035, recovering to their 2022 peak as early as 2027. A moderate recovery — roughly 1.1% annually in real terms. But in this case, averages are obscuring more than they reveal.

Germany's residential property market is being reorganised around access to strong labour markets. A new study from the German Economic Institute (IW Cologne), commissioned by the Federal Association of Volks- and Raiffeisenbanks (BVR) and covering all 400 German districts, confirms that conclusion.

Regions with that access will see sustained real price growth; those without it face stagnation or decline of up to 20%. Connectivity, not the traditional distinction between urban and rural, is becoming the decisive factor. That shift will shape investment decisions, housing policy and asset valuations for years to come.

Connectivity is reshaping where value sits

The clearest beneficiaries are Germany's major metropolitan regions. Berlin leads the field with forecast annual price growth of 2.4%, followed by the well-connected surrounding areas of Hamburg, Frankfurt and Munich. Bremen, Brandenburg and Bavaria are also performing above the national average. The seven largest cities as a group are expected to grow at around 2% per year — the strongest in the country.

The Munich finding deserves particular attention. The city itself is not among the top performers. Almost its entire catchment area, however, is growing faster — well-connected suburban and peri-urban districts outpacing the core. The message is that mobility trumps centrality. Buyers and investors targeting access to a major labour market, rather than a prestigious postcode within it, are likely to fare better. In Bavaria and Baden-Württemberg, even more rural districts are participating in the upswing, provided transport links are strong. In North Rhine-Westphalia, the picture is starker: Cologne alone is registering significant growth of more than 2% annually, while much of the Ruhr moves in the opposite direction.

The regions under greatest pressure share two characteristics: declining populations and weakening labour markets. Large parts of eastern Germany outside the major cities, the Saarland, rural districts in Rhineland-Palatinate and significant portions of the Ruhr are all facing stagnation or decline in real property values. In the hardest-hit districts — the Erzgebirgskreis, the Vulkaneifel and Kronach among them — values are forecast to fall by close to 20% in real terms by 2035.

A second pressure layer compounds the demographic one. Districts dependent on automotive and energy-intensive industries — Zwickau being the most cited example — face the additional weight of industrial transformation. The shift to climate-neutral production will cost jobs and purchasing power in the short to medium term. As the IW economists note, the transition offers long-term opportunities; in the short term, the risks outweigh the benefits.

Two strategies for an increasingly uneven market

The policy implications follow the same logic. "Housing policy must take a more regional approach," says IW property expert Pekka Sagner. In shrinking regions, the focus shifts to maintaining existing stock, funding energy-efficiency upgrades and stabilising local markets. Building new homes where demand is structurally in decline is a drain on capital. In growth regions, the priority remains increasing supply to contain price pressure. "In the major cities, new-build construction remains the most urgent task — without more supply, price pressure will continue to rise," says Sagner.

BVR President Marija Kolak adds the political dimension. Delivering that supply requires federal government, states and local authorities to coordinate on planning reform, harmonising standards and reforming land transfer tax — coordination that has so far proved difficult to achieve.

For institutional investors, the IW study reframes what “location” actually means. Labour market strength and transport connectivity are no longer supporting factors; they determine whether residential value holds or erodes. Industrial transition adds a further fault line, reinforcing rather than offsetting demographic trends.

The result is not a single market, but a set of increasingly distinct ones. National averages still move — but they describe less and less. What matters is identifying which locations remain plugged into growth, and which are quietly disconnecting from it.