In Germany, demand for housing outside large cities is currently growing
Single-family homes are becoming more expensive faster than apartments
The latest figures show that in the second quarter, from April to June, at the peak of the first wave of COVID-19, apartment prices rose by an average of 5.9% across Germany compared to the same period last year. This was reported in mid-August by the Hamburg-based consulting company F + B, which specializes in the German residential real estate market. Its managing director, Bernd Leutner, pointed to particularly high dynamics in the segment of single-family and two-family homes. They became 9% more expensive year-on-year.
As Deutsche Welle notes, this is a new phenomenon. The trend of the past decade was the faster growth in prices for housing in apartment buildings, especially in Germany's largest cities with high population growth. These are the four German cities with a population of over 1 million – Berlin, Hamburg, Munich and Cologne, as well as Frankfurt am Main, Stuttgart and Düsseldorf. Now, over the last two years or so, the rise in prices for single-family homes, including in small towns, is accelerating.
Experts see the main reason in the fact that the price levels for buying and renting housing in large cities are increasingly forcing people to move to more affordable suburbs and even to remote rural areas.
Apartment prices in Germany are unlikely to fall significantly
And now the coronavirus pandemic could give an additional impetus to the outflow of residents beyond large cities, away not only from unaffordable prices but also from the constant accumulation of potential carriers of the infection. Especially since, due to COVID-19, the number of specialists working remotely from home has sharply increased. For many, the ability to expand living space and allocate a separate room for a home office is now much more important than geographical proximity to the office.
In this situation, experts do not rule out a slowdown in price growth for housing in apartment buildings and even some decline. According to F + B, in the second quarter, in 10 of the 50 most expensive German cities, the price dynamics in the apartment market were negative. However, in the worst case, this is a few percent; there is no talk of any collapse.
Thus, buying an apartment in Germany for purely speculative purposes, in the hope of rapid significant appreciation, now seems extremely risky. Especially since in recent years, experts have repeatedly asked whether real estate bubbles have begun to inflate in some German cities. Moreover, the country is experiencing a construction boom.
Mortgages in Germany currently cost less than 1% per annum
However, potential homebuyers or investors should hardly hope for a significant widespread decline in apartment prices. "Assume that real estate, at least in the short term, will not become much more affordable," writes Hermann-Josef Tenhagen, editor-in-chief of the portal Finanztip, which advises German consumers on financial matters, in his column on the website of the popular weekly Der Spiegel.
To the most "hardened," as he puts it, the expert recommends waiting for "winter symptoms of the crisis," when the number of properties that will have to be sold at auction due to non-payment of debts may increase.
The key factor ensuring still high demand for residential real estate and thus stable or even rising prices remains record-cheap mortgages. "Rates for ten-year loans are near their historic lows in August 2020," states the portal Interhyp, which specializes in housing finance services.
According to its data, German banks are currently offering ten-year mortgages at an average of 0.75% per annum. The low point was reached in March, at the time of the rapid escalation of the pandemic, when the rate fell to an unprecedented 0.68%. For comparison: five years ago it was 1.8%, ten years ago it was above 4%. A 15-year loan can now be obtained at an average of 1.04%.
Subsidized loans from the state bank KfW
None of the credit institutions surveyed, Interhyp emphasizes, expects further rate cuts within the next year. At the same time, it is not excluded that they may rise slightly as the economy emerges from the crisis. However, all participants in the survey conducted in early August are confident that there will definitely be no significant increase in mortgage rates as long as the European Central Bank (ECB) does not abandon its zero interest rate policy.
As long as such unprecedentedly favorable lending conditions persist, high demand for residential properties is virtually guaranteed. Especially since those who buy an apartment or house for their own use can also take advantage of a system of subsidized loans of up to 100,000 euros from the state bank KfW.
True, under current extraordinary conditions, it cannot offer an interest rate below the market rate, and it currently stands at the same 0.75-0.77%, but KfW is willing to lend for terms of up to 25 years and to exempt from loan repayment for the first 1-3 years. The corresponding contract is arranged by the commercial bank from which the buyer takes the mortgage.
Large regional differences in the real estate market
But high demand for apartments and houses in Germany will also be supported by investors who, in times of crisis, are looking for particularly reliable objects to invest their capital and are interested in a stable source of regular income. Among such investors, there are many foreigners. For example, Russians like to buy German real estate, although it should be noted that this does not give them advantages in obtaining a visa.
Renting out an apartment or house in Germany is not difficult: about half the population lives in rented accommodation. This is one of the peculiarities of the German real estate market. Another is the very significant regional differences. These are reflected in the huge variation in housing prices, as well as in different rates of property transfer tax and the cost of real estate agents and notaries.
In Germany, which distinguishes it from many other countries, the most expensive real estate is not in the capital at all. According to data from F + B, Berlin ranked only 35th in the second quarter in the list of the most expensive localities in Germany: a square meter in apartments cost an average of 3,900 euros there, slightly more than in Cologne – 3,820 euros. At the same time, in Hamburg the price was 4,900 euros, in Frankfurt am Main 5,240 euros, and in Munich 7,220 euros. So housing in the Bavarian capital (as well as in its surroundings with picturesque lakes and views of the Alps) was and remains the most expensive in the country.
At the same time, in Bavaria, as well as, for example, in Saxony with the cities of Leipzig and Dresden, the property transfer tax is 3.5% of the property price, in Berlin 6%, and in the federal state of North Rhine-Westphalia with the cities of Cologne and Düsseldorf even 6.5%.
The best age to buy a home in Germany
At the same time, in the federal states of Berlin, Brandenburg (capital Potsdam), Bremen, Hamburg and Hesse (with the cities of Frankfurt am Main and Wiesbaden), the real estate agent's fee, reaching 7% of the transaction amount, is still paid only by the buyer, while in other regions of the country the seller also participates equally in the brokerage commission. However, at the end of 2020 this exception will be abolished, and Hermann-Josef Tenhagen recommends his readers to wait a couple more months before buying a home in these states: the costs for the agent will be halved.
But even after this change in legislation, in different parts of Germany, when buying a home, you will still have to pay an additional 10-15% of the property value for services and taxes. Therefore, Professor Tobias Just of the University of Regensburg, in an interview with the economic publication Wirtschaftswoche, advises university graduates not to acquire their own housing too early, before reaching the age of 30.
The real estate market economics expert believes that one should first pay off any possible student debts and save up an amount that would not only cover the incidental costs of buying a home, but also provide a sufficiently large down payment. With current low mortgage rates, this does not have to be 30%, as some experts traditionally claim, but Tobias Just strongly advises against taking out a loan for the full value of the property, as some banks now offer.
At the same time, the professor regrets that the average age of first-time homebuyers in Germany still exceeds 40: "If we could halve the incidental costs, this could happen a couple of years earlier."