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Germany house price news, analysis and trends

Housing news in Germany: no longer affordable

Housing prices

The German housing market has been a historically stable one. However, the last four years have seen an upward trend in prices. Housing prices in Germany are becoming unaffordable and the main contributor is the shortage of availability.

Housing supply is not keeping pace with demand. In 2017, dwelling building permits dropped by 7.3%, but increased slightly during the first 8 months of 2018 by 1.9%.

Official statistics show that the average German household spends one-third of their monthly income on rental or bond repayment, energy and maintenance, whole those living alone have to fork out 40% of their income.

The German price index rose by 4.89% in 2018 for already existing home prices and apartments having a bigger increase than new home prices. According to Savills, during the first half of 2018, €8.8bn worth of residential properties exchanged hands, an increase of 19%, compared with the corresponding period of the following year.

The German housing market was not affected by the global financial crisis that caused the slump in 2008-2009. The growing demand has been spurred on by extremely low interest rates and bond yields, despite the fact that most loans are on long-term interest rates, which are higher than fluctuating rates.

Contributing factors

Angela Merkel, Germany’s Chancellor, has reaffirmed the government’s commitment to adding 1.5 million housing units during the current legislative period. The plan is to offer tax incentives to investors, who will be able to write- off 5% of the acquisition and construction costs of the development. This will be accompanied by annual write-offs of 2% which will only be applicable if the apartment is let for 10 years. This funding will not apply to luxury or vacation apartments and will only be available to investors building for less than €3,000 per m2. Started in 2018 the program will run until the end of 2021. The German Haus & Grund homeowners association, the largest in the country, has argued that this amount is too low, because of the demanding building codes and rising wages.

Germany’s growth continues to outpace that of other European countries, currently at 1.9% and it has improved its public finances, ending 2017 with a budget surplus of 1.2% according to the IMF.

With an aging population its work force is shrinking, but immigration is encouraged and measures, which include also day-care centers, are an incentive for women to join the workforce.

Rental yields

Germany’s big cities have low rental yields as prices of apartments continue to rise rapidly.

Munich is the most expensive city with selling prices of ranging from € 6,000 to € 10,000 per m2. Berlin and Frankfurt are becoming increasingly expensive too with a price range of €3,000 to €6,000 per m2.

Yields are relatively low in all three cities, where an apartment of 120 m2 will yield 3.5% in Munich and Berlin and 3.7% in Frankfurt. The rental for an average 120m2 apartment in Munich will be €2,250, €1,500 in Berlin and € 1,700 in Frankfurt.

Since there is an acute shortage of affordable apartments throughout Germany, anyone investing in lower end areas will have no difficulty in letting out the property.

The law in Germany is pro-tenant, with unlimited contracts been standard, giving the tenant security of tenure. If the termination of the lease would lead to hardship for the tenant and his family, they can object and seek continuation through legal channels.

Rents can be freely negotiated, but can be appealed if deemed exorbitant by the tenant. Increases are controlled and cannot exceed 20% in nominal terms over three years.

Taxes and costs

Germany has a high rental income tax with progressive rates of up to 45%. Capital gains tax does not apply to properties that have been held for more than ten years.

Inheritances are taxed at progressive rates that range from 7% to 30% for spouses and children.

Residents and non-residents are all taxed according to the same system, but there are some exceptions to filing options (joint returns is one).

Transaction costs when purchasing a house vary from 9.02% to 16.35%, making them moderate to expensive. Real estate transfer tax of between 3.5% and 6.5% will be levied depending on the state where the property is situated. Real estate agent fees are negotiable from3% to 6% and VAT of 19% is applicable.

 

Conclusion

Official statistics, from Eurostat, show that unemployment levels continue to be low in Germany; at 3.4% they are lowest in the entire euro zone, which has an average of 6.7%. Inflation is currently at 1.7%, unchanged from last year.

Germany’s economy will continue to expand, despite global trade tension as the country has a strong domestic demand.

Housing shortages will have to be addressed as a growing number of people move to German cities, from within the country and from abroad. Strong population and employment growth are driving the demand. Germany is opening its doors to skilled workers from outside the EU to curb labor shortages. Germany is often chosen by highly educated and skilled individuals from other countries of the EU  who seek employment opportunities.

The current real estate cycle started in 2009, the demand is pushing prices up significantly and prices of apartments in some cities have doubled. Despite the increases, Germany’s central bank, Deutsche Bundesbank, insist that this is not a property bubble and that one is highly unlikely, even in the event of unexpected increases in interest rates.

Rita Monteiro

Rita – After graduating from NYU with a master degree in history, She was also a columnist for many local newspapers. Rita mostly covers business and Technology topics, but at times loves to write about reviews as well.
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