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PROPERTY

Renting versus buying in Germany: What is actually cheaper?

Renting is heavily embedded in German culture - but what makes the best financial sense for you?

'For Sale' sign.
'For Sale'. Photo: DPA

Arrivals from abroad – particularly from English-speaking countries – are often surprised at Germany’s rental culture.

But while more Germans rent on average than elsewhere, does this make financial sense? Put simply, it will depend on your personal financial and personal circumstances. 

Other factors, like where you want to live – i.e. urban or regional – are also important

Studies into renting versus buying are published regularly in Germany and frequently come to different conclusions. 

In April and June of 2019, weekly German news magazine Spiegel ran reports on two different studies into renting versus buying: each of which had a different conclusion. 

Reports such as these looking at the comparative cost of renting and buying in Germany’s more competitive urban markets like Munich and Hamburg find that renting will be a far lower monthly outlay.

While this may benefit some individuals and families for a period of time, renting makes less sense from a long-term investment perspective. 

Other studies which compare the investment value of renting plus investing in the sharemarket against buying a home have found that the latter has a greater investment value, although there are of course caveats due to the potential volatility of shares and housing bubbles. 

For those who want to invest and who have one eye on retirement, buying a home will over time be the cheaper option – but only for those who can afford it. 

READ ALSO: It’s not that hard: the beginner’s guide to buying a home in Germany 

Mortgage advisor Chris Mulder, from Hypofriend, told The Local that buying makes sense in the medium to long-term – even in rent-loving Germany. 

“At a fundamental level, what you see in Germany is that the people that rent, they end up poorer than the people that buy,” Mulder said. 

Why do Germans rent rather than buy? 

More than half of Germany’s population rent their homes – significantly less than the 70 percent on average that own their own homes across the EU. 

Unlike the United States, United Kingdom, Australia or other countries where getting on the property ladder is a central (if sometimes unachievable) aim for most, many Germans are often content to rent for most of their lives. 

A look at history as well as an understanding of German tenancy laws explains this somewhat. 

Post-war Germany looked to improve the domestic economy by building – creating a larger supply of units in the process.

READ ALSO: The reasons why so many Germans rent rather than buy 

Leases are long, tenants can make significant adjustments to the property and landlords face greater barriers in evicting tenants than in many other countries. 

And while it differs from state to state, Germany has various ‘rent control’ laws which prevent landlords from unilaterally raising rental prices and giving renters greater certainty than they have in other countries. 

Renting versus buying: What makes the most financial sense for you? Photo: DPA

What makes the best financial sense?

Renting versus buying will depend on your personal circumstances – as well as your short and long-term goals. 

In the short-term, buyers will often have to service their mortgage plus a range of other costs – from upkeep to taxes. 

Someone staying short-term in Germany might not want to make a financial commitment, while the comparatively higher capital needed to purchase a home in Germany will prevent those who don’t have a large amount of savings (or wealthy parents). 

A study from the Hamburgisches Weltwirtschaftsinstitut (HWWI), which looked only at monthly costs for renting and buying, found that renting was cheaper in 112 of 401 urban districts in Germany. 

As noted by Spiegel, which reported on the study: “in 112 of the total of 401 districts and cities in Germany… buying still seems to be worthwhile compared to renting”.

“These include large cities from the Ruhr area such as Gelsenkirchen, Duisburg, Dortmund or Bochum as well as the eastern German cities of Chemnitz and Magdeburg.”

This study did not however take into account the long-term investment value of buying a property – nor did it consider what is perhaps the most important factor for people when thinking about renting or buying: retirement. 

But according to Mulder, from mortgage advice firm Hypofriend, buying a house is likely to pay off quicker than most people think – even with Germany’s higher-than-average up-front costs. 

“Buying a house involves quite a few up front costs. In Germany these up front costs are high. Real estate agent fees can be as high as 7.14 percent, notary fees 2 percent and taxes on the purchase can be up to 6.5 percent,” Mulder writes

Mulder told The Local that homes are currently far more affordable in Germany than in previous years. 

“In Germany, actually houses right now are still very affordable because interest rates are so low. So compared to 20 years ago, houses are more affordable than they were,” Mulder said. 

“It (buying) totally makes sense to buy in Germany – but you just have to swallow hard when you see those fees.”

Hypofriend’s mortgage calculator shows that the decision to buy a home in Germany can pay itself off in under five years, far lower than the decades-long predictions made by other organisations. 

‘For Sale’. Photo: DPA

‘On the property ladder’ 

In recent years, rising real estate prices in Germany – particularly in urban areas – might have demonstrated the investment value of owning your home, but it has made getting on the property ladder unaffordable for many. 

In Germany’s seven largest cities, house prices almost doubled between 2009 and 2018

Mulder says that renting – while perhaps appearing cheaper at first, particularly for people who do not have a deposit – is culturally embedded in Germany but has long-term, negative consequences. 

“This notion of the property ladder is not as much a part of the German culture. There is this huge discouragement of buying (property),” Mulder told The Local. 

“You have these huge transfer taxes that people pay, then you have these extraordinarily high real estate agent fees… what it in a way encourages is for people to have this ‘hand to mouth’ kind of life. 

“So you spend your income on your rent – what you have left you go and buy a big car, which depreciates quickly, and by the end of your life – you don’t have something left for your old age which gives you financial freedom and space.”

Member comments

  1. Maybe some local Germans can comment on what they think of the acquisition costs of a home in Germany when buying. Being from North America i laughed when an agent first shared the fees and taxes. over 6% for agent fees (who doesnt do most of their own homework with the internet these days) but by far the biggest turn off was the crazy level of transfer tax the government has their hand out for. As much as 6.5% just for the privilege of buying an over priced place in Frankfurt, not a chance. In total 15% of the purchase price is for the vultures out with their hands and its certainly not a value added fee, its theft pure and simple. They having a reasonable fee for the purchase and transfer and maybe more Germans would buy a home vs renting. Also, with the tax incentive for corporate landlords, the government has created its own problem with larger inner city rents. Its not that hard, just stop being greedy with taxes in this country.

    1. I couldn’t agree more. The agents, the Government’s and the notary taxes and charges add approximately 12% to the buying process, which at inflation rate of 3% means 4 years before you breakeven. Both the agents and the Government just don’t seem to get that by reducing their fees/taxes to 1% they would massively increase market activity and actually increase revenues. And as for a notaire charging a percentage, this just makes me angry – no competition and the same amount of work irrespective of house price.

  2. We don’t find homes here affordable at all. Homes we would turn our nose up at here run minimum €750,000. Anything worth living in is above €1,000,000. You can still by a new, great home in an urban center in the US for $500,000 to $600,000. It is crazy.

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PROPERTY

REVEALED: The German university towns where property prices are going up (and down)

Germany's property boom is grinding to a halt, but according to a recent survey, a number of smaller university towns are still seeing an upswing in prices. Here's where experts say it could make sense to invest.

REVEALED: The German university towns where property prices are going up (and down)

With rising interest rates and a potential recession on the cards, the prospects for Germany’s housing market have been looking increasingly gloomy of late. Back in September, a study by the Hamburg-based Gewos Institute for Urban, Regional and Housing research revealed that interest in property purchases has slumped, with sales of flats and houses in Germany set to drop by seven percent in 2022. 

Based on the data for the first half of the year, real estate companies are expected to see their revenues decline for the first time since 2009, Gewos revealed. In places like Munich and Frankfurt – some of the most expensive German cities where property prices have been rising for years – analysts from Swiss bank UBS predict that the housing bubble could be about to burst.

READ ALSO: Why Germany’s property boom could be coming to an end

Outside of the major metropoles, however, investors have long been eyeing up smaller cities and towns where property prices remain low. Now, a new analysis of property prices in Germany’s university towns suggests that student hotspots could be particularly attractive, despite the volatile housing market. 

For the survey, estate agent Von Poll Immobilien looked at price trends in a total of 46 university towns across Germany from the the first quarter to the third quarter of 2022,  excluding so-called ‘A’ and ‘B’ cities like Berlin, Düsseldorf and Cologne. To be classed as a university town, at least 7,000 students had to be resident there. 

In 35 of the towns, house prices have either fallen or stagnated throughout the year. Saarland’s capital Saarbrücken showed the most extreme drop in property prices over the period, with the cost of property per square metre sinking by 11.9 percent. In Q3, the average cost of buying a flat in Saarbrücken was €2,322 per square metre. 

Behind Saarbrücken, the university towns of Lüneberg and Erfurt showed the most dramatic fall in house prices, with a dropoff of 11.8 percent and 9.4 percent respectively. In both Göttingen and Ulm, house prices fell by 8.2 percent, while Bayreuth and Oldenburg sank by eight percent over the same period. 

“The real estate market has been visibly on the move in many places since the spring. This also applies to the smaller university towns,” explained Daniel Ritter, managing partner at von Poll Immobilien. “Real estate prices are stagnating or falling in certain regions and segments – although very good and high-demand micro-locations will be less affected.”

READ ALSO: EXPLAINED: What you need to know about buying property in Germany

Bucking the trend 

Though prices remained stable or fell in around three quarters of the university towns surveyed, 11 of the student hotspots exhibited high growth despite the challenging market. 

The biggest jump in property prices was in the town of Erlangen, a Bavarian town just north of Nuremberg, where the price per square metre rose by 8.3 percent to €5,449. This was largely spurred on by the presence of big companies like Siemens, Adidas and Puma in the region, which has been driving interest from foreign investors.

Prices also went up significantly in the idyllic town of Coburg, another Franconian town located just 90km to the north of Erlangen. Here, property prices shot up by 6.3 percent to €2,795 per square metre. 

In other regions, the spike was less dramatic, though seven of the university towns saw modest price rises over the period. Bamberg, Kaiserslautern, Konstanz, Aachen, Flensburg, Frankfurt (Oder) und Magdeburg all saw house prices go up between 1.5 and 3 percent between Q1 and Q3. 

Constance harbour

Numerous ships docked in the harbour of Constance , a university town in the south of Germany. Photo: picture alliance/dpa | Felix Kästle

“The announcement that the American semiconductor manufacturer Intel was settling in Magdeburg had a noticeable impact on the property market. Since then we have seen a surge in property enquiries. However, there were fewer property offers and stable prices at that time,” said Heike Hoffmann, an estate agent at Von Poll Immobilien Magdeburg. “Against the backdrop of higher mortgage rates and the current inflation trend, however, we are noticing a reluctance to buy.”

“Nevertheless, many sellers are sticking to their high asking prices, which means that the number of property offers on the Magdeburg market has almost doubled compared to the same period last year.”

READ ALSO: How the housing bubble in Frankfurt and Munich could be set to burst

The cheapest and most expensive university towns

There were also significant differences in the asking prices for property across the university towns surveyed.

The property price analysis of the smaller university towns for the third quarter of 2022 suggests that prospective buyers can expect the highest prices for a flat in Constance at €6,321/m2 and Potsdam at €6,029/m2. But while prices per square metre in Constance have risen slightly by two percent compared to the first quarter of 2022, they dropped by as much as 7.8 percent in Potsdam, the capital of Brandenburg.

“Recently, we recorded significant price increases in Potsdam and property sellers were able to hold on to the sometimes very high asking prices – this is now changing,” said Andreas Güthling, branch manager of Von Poll Immobilien Potsdam and Werder. “Due to the increased financing interest rate, many prospective buyers now have to recalculate their search budget.” 

Properties in the pricier university towns otherwise ranged between €5,000 and €6,000 per square metre – a similar price to flats in Berlin and Stuttgart. The majority of these were located in the southern states of Baden-Württemberg and Bavaria, with Freiburg im Breisgau topping the charts at €5,534/m2. 

Map of university towns

Property prices in the smaller university towns in Q3/2022. Source: Von Poll Immobilien

The fourth most expensive town – where prices are also rising most steeply – was Erlangen, where property currently costs €5,449/m2, followed by Tübingen at €5,390/m2, Regensburg at €5,176/m2 and Heidelberg at €5,134/m2. 

However, not all of the towns came with an eye-watering price tag for property. At just €1,785 per square metre, property in the town of Chemnitz in Saxony was by far the most affordable location for buyers – though prices of between €2,000 and €3,000 per square metre were far from unusual in the survey.

With the exception of Frankfurt (Oder) – which is located in Brandenburg on the Polish border – the most moderate prices were found in central and western German university towns, including Magdeburg, Wuppertal, Saarbrücken, Mönchengladbach, Hildesheim, Siegen, Kaiserslautern, Coburg und Kassel.

Where are the best investment opportunities?

According to Von Poll Immobilien, a major factor in deciding the potential for good returns on a buy-to-let is the so-called Purchase Price Factor, or Kaufpreisfaktor. This essentially calculates how long a property would need to be rented out in order to earn back the purchase price.

A property with a factor of 20 would have to be rented out for 20 years, while another with a factor of 40 would have to be rented out for 40 years, and so on.

For several years, a multiplier of 20 was considered a benchmark for a very profitable investment. With steep rises in property prices, however, this benchmark has shifted.

“In most German regions, purchase price factors of around 25 can now be found, but multipliers of 30 are no longer uncommon,” the researchers at Von Poll Immobilien explained. “In metropolises and large cities in particular, purchase price factors often exceed this threshold many times over.”

Entrance to Potsdam university

The entrance to Potsdam university. Photo: picture alliance/dpa | Christophe Gateau

In almost half (22) of the university towns, the Purchase Price Factor was more than 30, while properties in the remaining 24 towns had a factor of between 20 and 30. 

In the third quarter of 2022, Potsdam had the highest Purchase Price Factor of 39.5, followed by Halle and Erlangen, with factors of 35.6 and 35.4 respectively,

On the lowest end of the scale was Saarbrücken, with a factor of just 21.8, followed by Göttingen (23.4), Mönchengladbach (24.3), Wuppertal (24.5) and Kaiserslautern (24.6). A full list of the purchase prices factors (in German) can be found here

“Cities with attractive courses of study continue to have especially high potential for value appreciation,” said Ritter. “However, investors should carefully examine the return potential of the locations and the targeted property as well as their individual criteria and market development and also consult professional real estate experts.”

READ ALSO: The hidden costs of buying a house in Germany

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