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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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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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