Real Estate investments in Germany
The costs of German houses are rising
After more than four years of heavy house price increases, the German housing market remains very strong. In a nation where the housing market has traditionally been relatively stable, this is a big change.
The explanation for that? Decade-long economic expansion, more than 1 million migrants, strong employment-related migration, record low unemployment, weak building supplies and low interest rates.
The German hedonic price index rose by 9.01 percent (7.6 per cent inflation-adjusted) from the previous year in May 2019 (hedonic indexes are attempting to equate precisely like-for-like, which is the easiest indicator of house price trends) based on the Europace estimates.
During the year to May 2019 the real estate space looked like this:
- Apartment prices rose by 10.22 percent (8.79 per cent inflation-adjusted).
- New home prices increased by 7.95 percent (6.55 per cent inflation-adjusted).
- Established house prices increased by 8.91 percent (7.49 per cent inflation-adjusted), marginally smaller than the previous year’s 9.03 percent rise.
The German real estate sector was one of the few that prevented a recession in the aftermath of the global financial crisis of 2008-2009.
Very low interest rates and bond yields have boosted persistently rising demand, given the fact that most German mortgage lenders get loans at long-term interest rates higher than the “tracker” average.
Residential property sales in Germany amounted to €15.1 billion (US$ 16.9 billion) in 2018, down 3 percent from the previous year, according to Savills. Despite this, it remains the third highest purchase volume over the last 10 years.
Low building activity is another explanation for the continuing increase in house prices. Housing supply is not up to demand. In 2018, housing approvals decreased marginally by 0.2 percent y-o-y to 347.292 while housing completions rose by a minuscule 0.9 percent y-o-y to 287.352 units, according to Destatis. It is inadequate due to an growing urban population and a increase of migration. In the medium term, the country wants to develop about 400,000 flats annually to avoid urban housing shortages, according to HDB President Thomas Bauer. In Q1 2019, building approvals declined by 2.8% to 75,600 units relative to the same time last year.
The crisis in migration has contributed to the burden. It has been estimated that there are actually more than one million refugees in Germany.
Following price spikes, the German Bundesbank, the central bank of Germany, has ruled out the existence of a full-blown housing bubble – at least not yet.
Michael Voigtlaender of the Cologne Institute of Economic Analysis believes that rising rates of their own are not enough to build a bubble – you have to look at the fundamentals. Germany has a healthy mortgage market with reasonable equity levels and a relatively modest pace of home building. Price collapses are usually caused by a lot of construction, and the reverse is true in other German towns.
Heavy house price gains are likely to persist in the coming years. As a result of globalization and a continuing uptrend in the job market, home prices and rents are expected to continue to increase. Also at the present stage, thanks to low interest rates, the ability to take out loans will continue. The national process is set to run until 2022 or beyond, according to Deutsche Bank.
Germany’s economy is declining, though. In 2018, the economy reported a slow growth of just 1.4%, down from 2.2% in 2017 and the lowest growth in five years, according to Destatis. Europe’s largest economy is already growing this year, with GDP rising by a mere 0.4% y-o -y in Q1 2019. As such, the government has recently lowered its growth estimate to 0.5 percent this year, half the rate previously expected.
Smaller yields in Germany’s big cities
House and apartment prices in Germany continue to increase at a fast pace.
Munich is Germany’s high-cost king, with costs per square meter (sq. m.) ranging from €6,000 to €10,000. The purchasing price for apartments in Munich’s major residential districts is around €7,800 per sq.m.
Berlin is becoming more pricey, with costs ranging from €3,000 to €6,000 depending on the venue.
Frankfurt is almost as costly as Berlin now.
How much are you going to earn?
- Munich: A 120 sq.m. apartment can be leased for about EUR 2.250 a month, receiving a return of 3.5 percent.
- Berlin: A 120 sq.m. apartment can be leased for about EUR 1.500 a month, receiving a return of 3.5 percent
- Frankfurt: A 120 square meters apartment can be leased for about EUR 1.700 a month, receiving a return of 3.7 percent.
These are just approximations and they’re not big yields.
Wherever you shop, it’s doubtful that you’ll have a lot of trouble leaving your flat. Especially at the lower end, there is an acute shortage of affordable apartments as the German boom continues, pulling workers from all over Europe.
Round trip transaction costs in Germany are moderate to high.
Roundtrip costs are low to moderate in Germany
Roundtrip transaction costs are low to moderate at around 9.02 per cent to 16.34 percent of the overall volume. Real estate sales tax is assessed at 3.5% to 6.5%, based on the federal state where the land is located. Real estate agent fees are negotiable from 3% to 6% plus 19% of VAT.
Landlord and Tenant
German law is pro-tenant
German law bends strongly against the owner.
Rents: While rentals may be voluntarily negotiated upon, “exorbitant” leases may consequently be challenged.
Price rises are regulated and can not reach more than 20% in nominal terms (less in real terms) for three years.
Tenant Security: Unrestricted contracts are normal, essentially providing the occupant with security of tenure. The occupant may object to the “usual notice” and may seek an extension, if the termination of the lease would cause problems for the tenant or the family, even in the light of the valid interests of the owner.
The German economy weakened
Europe’s largest economy is slowing down this year, with GDP rising by a mere 0.4% y-o -y in Q1 2019. The Government has recently cut its estimate of growth in 2019 to 0.5 percent, half the rate previously expected.
In 2018, Germany reported a fiscal surplus of €58 billion (US$ 65.1 billion), its fifth straight year of surpluses, and the highest point since reunification, based on estimates published by Destatis, which led to around 1.7% of GDP last year, up from 1 % of GDP in 2017.
Germany’s unemployment rate was 3.1% in May 2019, much below the euro region average unemployment rate of 7.5%, according to Eurostat.
Germany’s annual inflation rate was 1.4% in May 2019, according to the Destatis. According to the European Commission, the average inflation rate is forecast to be 1.5% this year.