Soaring New Rents Threaten Economic Growth

The widening gap between new-lease rents and existing contracts is dampening workforce mobility and potentially curbing Germany’s economic expansion.

As rental prices for new leases surge across Germany, economic mobility and workforce flexibility are under pressure, warns a new study from the Munich-based ifo Institute. The researchers argue that rising asking rents make moving for better job opportunities unaffordable for many, dampening labor mobility and thus economic dynamism.

New Lease Rents vs. Existing Contracts: A Widening Gap

The study highlights a stark divergence between rental rates for new contracts (so-called “offer rents”) and existing, long-term leases. Nationwide, asking rents have climbed roughly 50 percent since 2013, while existing rents have increased by only about 19 percent. In Germany’s seven largest cities, the new lease rents have jumped nearly 75 percent in the same period.

This has created what the authors call “two parallel rent markets”: one for existing tenants protected by older leases and another for new renters facing extremely steep increases.

Oliver Falck of the ifo Institute warns, “If workers can no longer afford housing in metropolises, cities lose economic power.”

Mobility Loss: Staying Put Because Rent Is Too High

One of the key risks, according to the researchers, is that people are less inclined to relocate for a better job or a more fitting residence when faced with a huge jump in rent.

Because existing tenants benefit from lower rents, many choose to “lock in” their favorable contracts even if their living situation no longer suits them (commutes, family size, etc.). As Pascal Zamorski, a co-author, puts it:

“Given the disparity between existing-contract rents and new-contract rents, people tend to stay in cheaper apartments even if they no longer match their life situation. That reduces mobility and limits availability for the labor market.”

This dampening of residential mobility can indirectly slow economic growth: when workers can’t move to where demand is rising, mismatches in labor supply accumulate.

Burden on Lower Income Households

The study flags that the rental burden is especially acute for lower-income households. In major German cities, people in the bottom third of the income scale seeking new leases had to allocate on average 50 percent of their disposable net income just for rent.

While housing allowances and welfare transfers do help, the sheer speed and magnitude of rent increases in new contracts overwhelm most subsidy mechanisms. The authors caution that such public support is not enough to offset structural rent inflation indefinitely.

Economic Consequences: Workforce Rigidity & Growth Drag

The ifo researchers emphasize that a healthy economy requires the ability to reallocate labor efficiently. When people can’t move to meet changing regional job growth, the labor market becomes rigid. Germany’s cities may then lose some of their competitive strength.

Another German think tank, the Pestel Institute in Hannover, arrived at a matching conclusion: frozen housing markets lead to frozen labor markets. People become unable to move between regions in search of jobs, even when opportunities arise.

Thus, solving the housing issue is portrayed not merely as social policy but as a necessary precondition for continued economic development.

Policy Proposals: What Must Be Done

The authors propose several policy directions to counter the problem:

• Focus on the supply side: build more housing, reduce bureaucratic hurdles, streamline approvals, lower construction costs.
• Better usage of existing stock: repurpose underoccupied or outdated properties.
• Targeted affordable housing grants: subsidies for lower-cost housing rather than broad rent controls.

While rent regulation can help dampen price spikes, it does not resolve the root issue of housing scarcity. The study warns that regulation alone is insufficient.

How sustainable is this divergence in rent markets?

If asking rents continue rising much faster than existing rents, disparities will widen. Over time, this gap may drive social and political pressure for intervention.

Are there limits to how much subsidies can mitigate costs?

Yes. Budget constraints and political feasibility mean that support cannot fully match accelerating rent inflation indefinitely.

Could rent regulation worsen supply problems?

If price controls deter new construction or investment, the resulting supply shortage might exacerbate the affordability crisis.

Final Thoughts

The ifo Institute’s findings deliver a cautionary message: runaway new-lease rents are more than an urban housing crisis—they pose a threat to economic growth, labor mobility, and regional competitiveness. Addressing these challenges requires bold, supply-oriented policies, not just band-aid regulation.

If cities and states fail to act, what might follow is not just a housing squeeze but a drag on Germany’s long-term economic trajectory.

Source: DIE WELT