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PROPERTY

How soaring German property prices are out of reach for buyers

With prices soaring in Germany's real estate market, more than half of renters say the dream of owning their own home seems increasingly out of reach.

Flats in Wutha-Farnroda, Thuringia
Flats in Wutha-Farnroda, Thuringia. Photo: picture alliance/dpa/dpa-Zentralbild | Martin Schutt

Though Germany is traditionally a nation of tenants, the soaring cost of rent and the attractiveness of owning property means many are considering investing in their own home. 

But according to a new survey conducted by mortgage broker Interhyp, most tenants who are currently renting in Germany believe they will never be able to afford to buy a flat or house in their local area. 

The survey of 1,000 buyers and prospective buyers shows that the majority find the prices daunting and many consider buying a property in their own region either “unaffordable” or “barely affordable”.

Average property costs €540,000

According to the mortgage broker, house prices have gone up by 10 percent each year for the past two years in a row, leading many renters to see home ownership as an increasingly distant dream.

Data from Interhyp suggests that price rises in the real estate market have continued unabated this year and may even be accelerating. 

In the first quarter of 2022, the average cost of building or buying a property, including ancillary costs, was €540,000  – an increase of 14 percent against the same quarter last year. 

In 2021, meanwhile, the increase in the first quarter was nine percent against the previous year. In metropolitan areas, the average prices are significantly higher than elsewhere. In Munich, one of Germany’s most expensive cities, the average house price stands at €905,000, while the average property in Hamburg costs €750,000.

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High prices are ‘off-putting’ 

Though Germany’s real estate market has long been considered a stable investment, it appears that spiralling prices are causing would-be buyers to lose confidence.

According to Interhyp’s survey, 65 percent of renters feel deterred from purchasing by the high property prices, while 44 percent think that the cost of property has become increasingly divorced from its actual value.

“Many of those we surveyed have the feeling that prices are rising ‘unceasingly into the immeasurable’,” explained Jörg Utecht, CEO of the Interhyp Group.

More worryingly, more than three-quarters (77 percent) of respondents believe that there’s a real estate bubble in Germany, with 58 percent blaming the low interest rates set by the European Central Bank (ECB) for the current property boom.

Not everyone agrees that prices are increasing due to low-interest mortgages, however: 46 percent believe low housing stock and faltering construction levels are responsible, while 36 percent say its down to speculators and investors. 

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

Inheritance and gifts are key

For many people who are trying to calculate the affordability of buying, it’s important that they don’t have to sacrifice their entire lifestyle to pay off a mortgage, Utecht said. 

“People do want a property, but not at any price,” he said. “Above all, they want solid, bearable and manageable financing, where holidays and restaurant visits are still possible.”

When it came to the factors that respondents thought could assist them in buying a home, 40 percent said their DIY or renovation skills could help, 35 percent said luck would be a factor and a third (33 percent) said a persistent search could be decisive.

Flats in Berlin

Flats in Berlin. Photo: picture alliance/dpa/dpa-tmn | Zacharie Scheurer

For more than a quarter of Germans (27 percent), an inheritance, a gift or the support of parents is a prerequisite for being able to afford a deposit or mortgage, while 67 percent were also forced to rely on their own savings. Unsurprisingly, 77 percent also had to rely on a loan of some kind.

The average value of the respondents’ savings was €128,000, the average ‘gift’ received was €94,000 and the average inheritance was €158,000.

“The high purchase prices can often only be afforded through inheritance, donation or high savings,” comments Utecht. “Those who cannot fall back on funds from the family usually need a high income and quite a few years to build up savings before a property purchase is possible.”

State aid was also considered to be a crucial part of helping first-time buyers get on the property ladder: 42 per cent of the buyers surveyed had used subsidies from the federal government, the state or local authorities to help purchase their first home.

READ ALSO: Where in Germany can you still snag a home for under €100k?

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PROPERTY

How Germany’s property boom could be slowing down

Prices continue to rise steeply in the German property sector - but experts are seeing signs of a trend reversal.

How Germany's property boom could be slowing down

What’s going on? 

The Federal Statistics Office has just released its latest figures on property prices – and let’s just say it’s not great news for would-be buyers. 

In the first quarter of 2022 – from January to March – house prices shot up by an average of 12 percent compared to the previous year. It was the fourth time in a row that properties had gone up in value by more than ten percent in the space of a year. If these latest figures are anything to go by, Germany’s property boom is still in full swing.

Nevertheless, there are few things about the property market in the Bundesrepublik that are giving experts pause for thought. 

The first is the fact that, from quarter to quarter, property prices don’t seem to be rising as rapidly as they were last year.

READ ALSO: How soaring German property prices are out of reach for buyers

In fact, from the fourth quarter of 2021 (September to December) to the first quarter of 2022, the cost of buying a flat or a detached and semi-detached house only went up by around 0.8 percent. 

In the previous two quarters, prices had risen by 3.1 percent and 4.1 percent respectively.

“This indicates a slight weakening of the dynamics,” the Statistics Office said. 

The second issue is that, with interest rates on the up, demand has all but collapsed. The third issue is the concerns of the Bundesbank that property prices could well be over-inflated. 

Does that mean people aren’t buying property right now?

Kind of. In any case, far fewer people were seeking out places to buy in the first few months of 2022 than they were throughout 2021.

According to the online property portal Immoscout24, the demand for properties for sale in the first quarter of 2022 dropped by 17 percent within one year.

Adverts for residential properties are staying up for far longer than they used to, and sellers are having an increasingly tough time finding buyers.

High-rise buildings in Erfurt

High-rise flats and older buildings make up the Erfurt skyline. Photo: picture alliance/dpa | Martin Schutt

Instead, it seems like Germans are returning to their age-old love affair with renting rather than buying. This could partly be to do with the fact that interest rates look set to rise over the coming years, making cheap mortgage deals increasingly hard to come by. 

“These developments could have a dampening effect on price trends in the medium term,” said ImmoScout24 managing director Gesa Crockford. This could offset the slight uptick in interest rates.

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So what’s the outlook? 

Not all too rosy, unfortunately. Though prices could continue to rise in the medium term, some experts believe that the property boom will slow down after a decade or so. 

This is partly due to stuttering construction rates: at the moment, the construction industry is struggling against some serious headwinds, from ultra expensive building materials to endless supply bottlenecks. 

Germany’s Central Bank (the Bundesbank) has been warning for some time that property prices are inflated beyond their actual value.

In cities in particular, prices are between 15 and 30 percent above a level that can be justified by longer-term economic and demographic factors, the Bundesbank stressed in February.

This trend was amplified by the Covid pandemic, which saw people increasingly seeking living space outside of the cities where supply is scarce. 

Experts from German bank LBBW also say they expect a price correction if interest rates continue to rise strongly and the economy fails to recover. 

In this scenario, LBBW believes that price declines of 20 to 25 percent are possible.

Of course, this may not apply to all regions of the country equally. There tends to be big differences in price trends, for example, between the former East and West of Germany. 

One other area that’s still going strong is the buy-to-let market. While demand for homes for personal use is slipping, it seems there’s still a big appetite for so-called “capital investments” that are occupied by renters.

READ ALSO: EXPLAINED: The German property tax declaration owners need to know about

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