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PROPERTY

Why Frankfurt could have the biggest housing bubble in the world

Frankfurt has topped a list of cities across the world most at risk of a real estate bubble. Here's what's going on in the financial capital, and why another German city is also seeing high house prices and rents.

Passers-by watch the sunset in Frankfurt on October 11th.
Passers-by watch the sunset in Frankfurt on October 11th. Photo: picture alliance/dpa | Arne Dedert

Residents in some parts of Germany – such as Frankfurt, Munich and Stuttgart – are used to high prices for both renting and buying a home.

But a new ranking lays bare just how overheated the housing markets are in two popular German cities.

And Frankfurt – the banking capital of Germany – has taken the top spot in the UBS Global Real Estate Bubble Index 2021, ahead of the likes of Toronto, Hong Kong, Munich, Paris, Amsterdam and Zurich.

Housing bubbles happen when the price of homes skyrocket due to an imbalance in supply and demand, and are further pushed up by speculative buying

READ ALSO: How did it get so expensive to live in Munich?

Source: UBS

The city in Hesse has the highest ‘real estate bubble risk’ for the period from mid-2020 to mid-2021 with 2.16 points.

“Frankfurt, Toronto, and Hong Kong top this year’s UBS Global Real Estate Bubble Index, with the three cities warranting the most pronounced bubble risk assessments in housing markets among those analysed.” said UBS in its study.

Every year, the major Swiss bank UBS investigates where the highest risk of a real estate bubble lies. According to this index, a value of 1.5 points indicates the risk of a bubble. UBS defines a real estate bubble as a strong and persistent deviation of the price level from fundamental data such as income, economic growth and population migration.

Munich took the top spot in 2020 with 2.35 points. It was followed by Frankfurt with 2.26 points.

READ ALSO: COMPARE: The cities in Germany with the fastest-rising rents

Why is housing so expensive in Frankfurt?

In Frankfurt, real house prices – that means they are adjusted for inflation – have risen by 10 percent annually since 2016, according to the UBS study. In no other major city in the world is the real estate market as overheated as in the Main metropolis. Rents have also increased by around three percent per year.

UBS said Frankurt’s score “is in bubble risk territory, which is the result of extremely strong price growth”.

“Currently, its price growth is still at the unsustainable level of 6 percent per year, though it has fallen below the national average.”

This is down to several factors, experts say.

“Solid economic and employment growth have laid the groundwork for these market dynamics,” said UBS. “The population has increased by more than 12 percent over the last 10 years.

“Although construction activity accelerated in the past few years, it did not keep up with rising demand. Consequently, rents have been climbing by almost three percent annually, making Frankfurt the city with the third-highest rental inflation among all those analysed.

“But extremely low mortgage rates and lax financing conditions were the real fuel of the housing frenzy. As rents have increased, Frankfurt has become a hotspot of speculative buy-to-let investments.”

Researchers said builders have been focused on luxury flats “which has added to price inflation”.

The skyline of Frankfurt.
The skyline of Frankfurt. Photo: picture alliance/dpa | Arne Dedert

To curb speculation, a second-home tax (Zweitwohnungssteuer) was introduced in 2019. People who own a second home in Frankfurt are liable to pay a tax that amounts to 10 percent of the annual net cold rent to the city per year. 

But things may be changing as demand goes down.

“Frankfurt has become increasingly unaffordable; the average price-to-income ratio has doubled within 10 years,” said UBS. “Alongside increased possibilities of remote working, population growth in the city has come to a halt, and people are moving away to more spacious locations in the suburbs.”

The real estate and consulting company Immoconcept also believes there’s a danger of a real estate bubble in Frankfurt.

In a recent study, they found that purchase prices and rents have risen for the tenth year in a row.

In the first half of the year alone, purchase prices rose by 17 percent. 

The real estate consultant Colliers also reported on record prices for apartments in Frankfurt. In new construction, an average condo now costs €8,000 per square metre, and in older buildings it’s about €6,000 per square metre. The annual increase in purchase prices has been around 12 percent since 2016, Colliers found.

The danger of a housing bubble is that speculators pour money into the market which makes places unaffordable. It can change neighbourhoods forever and fuel gentrification. The bubble bursts when the demand goes down. 

READ ALSO: Why rent prices are starting to fall in major German cities

What’s causing the boom in Munich?

Munich also scored highly on the list, although has slipped down the ranking from last year. The Bavarian capital has seen a lot of job creation and new residents over the last 10 years which has boosted the demand for housing.

“On average, real prices increased by more than eight percent per year between 2010 and 2019,” said UBS in its study.

This is bad news for people trying to find affordable homes. “Given low financing costs, speculative investment is still an important pillar of demand. Overall, the city has become a victim of its own success,” said UBS.

Munich has one of the highest price-to-rent ratios among all cities looked at by housing experts.

But the decline in affordable places to live, and the pandemic-driven need for more space, have shifted population growth to suburban locations, said UBS.

“Consequently, over the last few quarters price growth has stalled. And for the first time since 2012, rents have even corrected slightly.

Member comments

  1. Oh god please, there is no bubble here, not even remotely close. With interest rates at pretty much zero a price to income ratio of 12-14 would be expected. If you want to see a bubble look to Canada where prices are up 300+ percent since covid. Are housing/rents unfordable, yes, does that mean a bubble, no.

    1. Secondly proces vary massively depending on what type of place you want. For example in Langen (suburb of Frankfurt) prices range from 2500 per sqr mtr for a hochhaus to over 8000 per sqr mtr for a new build. So yes very affordable!

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RENTING

Everything you should know about renting a furnished flat in Germany

Furnished properties are increasingly popular in Germany - but it's worth knowing the rules around them to make sure you don't get overcharged. Here's everything you need to know before signing the contract on a furnished flat.

Everything you should know about renting a furnished flat in Germany

For someone moving to a new country or city, it seems like a dream scenario: you find a new place, pick up the key, and simply move in and unpack. Everything you need, from your bed to your coffee table, is already there waiting for you. 

You can dispense with the endless trawls through IKEA showrooms and trips across town to pick up second-hand furniture on Ebay Kleinanzeigen – not to mention the stress of endless decisions on colour schemes and measurements. 

It’s exactly this that makes furnished flats such a popular choice with foreigners. While they may not be a long-term option, the ease and flexibility of being able to move-in straight away makes them a great short- or medium-term option while you’re finding your feet in a city.

So, what’s the catch? 

A search for furnished flats on any rental property portal will reveal all. 

For around 30 square metres in Hamburg – the size of a large hotel room – it’s not unusual to see prices of around €2,700 or more per month, which amounts to a pretty hefty €90 per square metre. In Berlin, €3,000 per month may well be the price you pay for a tiny studio in a central location: €100 per square metre.

In the banking hub of Frankfurt, things are marginally more affordable. Here, a 30-square-metre furnished flat will set you back around €1,500. But that’s still a pretty steep €50 per square metre. 

Listings like these can give the impression that landlords are allowed to charge whatever they please for a furnished property. Thankfully, that’s not true – though the rules can get a little bit murky, especially when it comes to short-term lets.

READ ALSO: Six confusing things about renting a flat in Germany

Here’s a few other things you need to know. 

What is a furnished flat?

If a flat is rented as a furnished flat, it should have at least the bare essentials that are required to live in it. Generally, that would mean a bed, wardrobe, table, chairs and sofa, etc. 

However, you can occasionally find furnished flats that are “löffelfertig” (spoon-ready), which as the name suggests means they have everything you need, right down to cutlery and crockery. 

Why are furnished flats more expensive?

Generally speaking, landlords are entitled to compensation for the furniture they buy for the property, which can push the monthly rent up by as much as a few hundred euros per month. 

Since they don’t have to be clear about these costs and how different parts of the rent are calculated, some landlords may inflate the base rent as well, meaning that tenants may end up paying way over the odds. 

It’s also worth knowing that if properties are specifically defined as either holiday or short-term lets, landlords are exempt from many of the usual rent controls. 

Furnished holiday flat Germany

A modern furnished flat in Mecklenburg Western-Pomerania. Photo: picture alliance/dpa/Bades Huk | BRITA SOENNICHSEN

If the furnished flat is considered to be a holiday let, then the tenant is often required to pay tourist tax for each night they stay there. In this case, the flat also doesn’t have to be furnished to a particularly high standard as it is only intended to be lived in for a very short time. You may find this type of flat absurdly pricey compared to normal rentals in the city, and if money is a concern it’s best to steer clear of holiday lets for longer-term stays. 

If you work in the city and are staying somewhere for more than two months, the landlord may decide to class the property as a temporary let. In this case, the landlord is exempted from clauses like the Mietpreisbremse (rent brake), which are designed to slow down the rate of rent increases, and you should have a clear duration or move-out date specified in your contract.  

It’s important to note that the landlord will usually have to give a good reason for restricting the time period of the rental. This could be the fact that they or their family want to use it themselves or are planning renovations at a later date. 

READ ALSO: Altbau vs Neubau: What’s the difference and which should I rent in Germany?

How much more can my landlord charge?

As mentioned above, holiday and temporary flats can often be rented out for eye-watering prices – but there are strict rules on categorising a rental flat as temporary or holiday accommodation.

For an ordinary furnished rental, the rent should usually be roughly based on standard prices for similar properties in the same area (a system known as the Mietspiegel), with any premium features or fixtures adding slightly more to the monthly rent. As mentioned above, the landlord can also charge a surplus for the furnishings they include in the flat.

The broad rule of thumb here is that this should be linked to the value of the furniture and its depreciation in value of the course of time. Though landlords aren’t forced to be transparent about the system they use, the two most commonly used ones are the Hamburg and the Berlin model. 

Furnished flat

A cosy bedroom in a furnished flat. Photo: picture alliance/dpa/VDM | Rauch

With the Berlin model, the landlord is allowed to charge two percent of the total value of the furniture each month.

The furniture is assumed to have a lifespan of 10 years, so if the furniture is new when the tenant moves in, they can charge two percent of the purchase price of the furniture each month. If all the furniture in a flat cost the landlord €5,000, that would amount to €100 extra in rent each month. The value of the furniture goes down by ten percent per year, so after five years the landlord would charge €50 per month on top of rent, and after ten there would be no surcharge.

The Hamburg model assumes that furniture goes down in value over the course of seven years, after which time it’s worth just 30 percent of its purchase price. The amount that the tenant pays towards the cost of the furnishings each year is based on these calculations.

READ ALSO: 

Can I take furniture out of a furnished flat?

Yes! If you’re someone who likes to put your own stamp on a place, then you’re fully entitled to replace some of the furniture with your own.

But – and this is a big ‘but’ – you’ll be responsible for storing the furniture safely until you move out, and putting everything back in its previous place.

In other words, we don’t recommend chucking the coffee table out on the street with a ‘Zu verschenken’ label before moving in your own piece. We guarantee your landlord will not be amused once they find out. 

To clarify what’s meant to be in the flat when you move in (and when you move out), tenancy law experts recommend having a full inventory in the contract. That should help you avoid any nasty disputes in the future.

What if the furniture is damaged, missing or defective? 

If furniture is damaged, missing or unusable, you’re entitled to have it repaired or replaced and can also ask for a rent reduction.

Once again, it’s useful to have a full inventory of what should be in the flat to help you with these negotiations.

Do tenants in furnished flats have the same rights as other tenants?

Generally, yes. Having furnishings inside a property doesn’t change the legal status of the contract.

That means that your landlord can’t, for example, suddenly ask you to move out at short notice and without any cause. As mentioned, they also need to have a specific reason for limiting the duration of your contract – otherwise the move-out date isn’t valid. 

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