Property: Is it still worth buying in Germany?
For many who have come to Germany to work or study, the desire to own property is natural.
However, understanding whether it is a good time to buy property in Germany can make all the difference when it comes to finding your dream home. Together with German mortgage specialist Hypofriend, we discuss whether it still makes sense to buy in Germany and how to compare the costs of buying with those of continuing to rent.
So, what is the situation in Germany?
Compared with other European countries, Germany has become more affordable when it comes to buying property. Germany avoided the worldwide property boom of the early 2000s. This is thanks to a number of factors, such as the construction boom following reunification in 1990, and the slowing in population growth.
There’s no denying it, however – house and apartment prices are rising across the country.
Between 2010 and 2020, prices for both two-person apartments and single-family apartments have risen by 65 percent, according to the ‘Häuserpreisindex‘ of the Federal Statistical Office. This price rise is not uniform, however. There is a clear disparity between urban and rural areas, with apartments and homes in rural areas generally being cheaper and showing slower growth. Neither is the price uniform across the cities. As you can see in Table 1 (below), Munich and Frankfurt are well ahead of Berlin.
What are the significant costs of owning property in Germany?
German borrowers generally enjoy the lowest annual interest rates in history – falling around 6.5 percent to one percent for a ten year mortgage, since 2000. However, it is the combination of interest rates and the annual cost of maintaining a property (around three quarters of a percent, including administrative costs) that comprise the real costs of owning a property in Germany.
Ok, what makes more sense – renting or buying?
It’s a simple question of comparison. If you are annually paying more in rent as a percentage of your property’s value, than you would be in interest rates and property maintenance, then you know it makes far more sense to purchase.
But there is more. Any property will accrue in value, over the long haul more or less in line with inflation. With recent moves by the European Central Bank, shifting its inflation target to two percent, property buyers can expect in the long run a three percent value increase each year or more, as history shows.
This increase in value is compounded each year – what that means is that the annual value increase applies to the gains from previous years. Hold on to your home for 30 years at a three percent annual increase in value, and you can expect an increase in property value over that period of 143 percent!
It goes to show that buying is by far the better path to wealth creation.
How do I know whether it’s still a good time to buy?
A good way to know whether it’s still a good time to buy, is to understand how much an apartment or home costs per square metre (sqm), when renting or buying. Below (Table 2), you can see the average price per sqm for apartments in major German cities (for those between 60-80sqm).
You then need to compare the purchase price per sqm, including annual interests and maintenance costs, with the rental price per sqm. If the actual purchase price is below the calculated break-even price, it typically makes a lot more sense to buy.
For example, if you rent in Berlin with a sqm cost of €13.68, this corresponds to a sqm purchase price of €7,137, taking into account annual interest rates and maintenance costs of 1.5 percent, and the minimum purchase costs of eight percent are spread over the usual minimum stay of 10 years. The current average purchase price per sqm for Berlin is €5,212. Therefore, in this scenario, buying makes more sense than renting, even ignoring any appreciation gain.
Please note: Since major cities and metropolitan areas are very diverse, rental and purchase prices can vary greatly in different parts of the city.
So, is it still the right time to buy?
With hindsight, it is always easy to say, ‘Oh I wish I would have bought five years ago’. Going forward it is also easy to assume that prices will decline, therefore making buying more affordable.
Alas history tells us that house prices rarely decline. It takes a lot for this to happen - usually due to a sudden increase in interest rates or a small economic depression. For now, it would appear that is not on the cards.
Renting is still by and large much more costly than buying. If you consider inflation and house price appreciation, buying is still the clear winner for anyone willing to hold on to their property.
Thinking about buying? Hypofriend are the mortgage experts for expats, who can provide you with advice and assistance through every step of the property buying process, all in plain English. They have made it their mission to make the German mortgage market transparent, and to make the mortgaging process a sound financial decision, so you can enjoy your new home without worries.
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