In April 2014, the German hedonic house price index rose by only 1.9% y-o-y (0.6% in real terms), a slowdown as compared to the 4.8% growth in March, 5.4% in February, and 6.1% in January 2014. Back in September, Germany posted double digit y-o-y house price rises of 11.2%, based on the Europace figures.
- New homes had higher price increases, as the hedonic house price index for them rose by 3.7% (2.3% in real terms) during the year to April 2014.
- Existing homes had the lowest price increase, with their price index increasing by only 0.4% in nominal terms. Adjusted for inflation, the price index for existing homes actually fell by 0.9%.
Hedonic indices attempt to compare like-for-like exactly, so should be a better measure of house price trends than other indices.
Based on Dr. Klein’s trend indicator of property prices (DTI), house prices in the West and North-East regions were stabilizing during the first quarter of 2014.
In North-East Germany:
- Apartment prices in Germany’s capital, Berlin, rose by 7.24% during the year to Q1 2014 to €2,596 (US$ 3,527) per square metre (sq. m.). The median price of one- and two-family houses rose by only 3.74% y-o-y to €1,820 (US$ 2,473). As compared to the previous quarter apartment prices only rose by 0.27%, while one- and two-family houses rose by 0.97%.
- Hanover had the strongest y-o-y apartment price increase in Q1 2014, with prices rising by 12.49% to €1,563 (US$ 2,124) per sq. m. In contrast, the median price of one- and two-family houses rose by 2.08% to €1,612 (US$ 2,190) per sq. m. As compared to the previous quarter, apartment prices fell by 1.73%, while one- and two-family houses rose by 1.57%.
- Dresden had the second highest apartment price increase by 9.25% y-o-y to €1,944 (US$ 2,642) per sq. m., while one- and two-family houses rose by 6.37% to €1,818 (US$ 2,470) per sq. m.
- Hamburg, had the highest median apartment price in the region at around €3,047 (US$ 4,140) per sq. m., a 6.56% increase from the previous year. One- and two-family houses had a median price of €2,105 (US$ 2,860) per sq. m., 5.9% higher than in Q1 2013.
In West Germany:
- Dusseldorf had the highest apartment price increase in the region, rising by 6.56% to a median price of €2,201 (US$ 2,991) per sq. m. during the year to Q1 2014. One- and two-family houses had a median price of €2,016 (US$ 2,739) per sq. m., 1.23% higher than the previous year. As compared to the previous quarter, apartment prices fell by 0.56% and one- and two-family houses by 0.69%.
- Apartments in Cologne had a y-o-y price increase by 6.05% to € 2,211 (US$ 3,004) per sq. m. The median price of one- and two-family houses rose by 3.65% y-o-y to €1,936 (US$ 2,631) per sq. m.
- In Dortmund, apartment prices had a lower y-o-y price increase as compared to houses with 3.59% to €1,256 (US$ 1,707) per sq. m., while one- and two-family houses rose by 4.79% to €1,683 (US$ 2,287) per sq. m.
In South Germany:
- Frankfurt had the highest y-o-y apartment price hike in South Germany, increasing by 10.75% to €2,368 (US$ 3,225) per sq. m. In contrast, one- and two-family houses had the lowest increase by around 2.57% to €2,060 (US$ 2,806) per sq. m.
- Apartment prices in Munich were the most expensive in the region, with a median price of €4,025 (US$ 5,482) per sq. m., up by 10.56% from the previous year. One- and two- family houses are also expensive, increasing by 6.51% to €2,995 (US$ 4,079) per sq. m.
- In Stuttgart apartment prices rose by 4.35% to €1,971 (US$ 2,685) per sq. m., while one- and two-family houses had a median price of €2,167 (US$ 2,952) per sq. m., a 5.70% increase from the previous year.
Total dwelling permits rose 12.9% to 270,364 in 2013, according to Federal Statistical Office (Destatis). The increase of dwelling permits was higher than the 4.9% growth recorded in 2012. During the same year, dwelling completions were 9.5% higher than in 2011, at around 200,466 units.
The recent slowdown can be attributed to tighter lending standards implemented in the latter part of 2013. House purchase loans rose by only 2.3% y-o-y to October 2013, according to the Standard and Poor’s (S&P).
Although S&P predicts continuous appreciation of residential real estate prices in Germany over the next two years, house price growth is expected to slightly decelerate from S&P’s 5% price increase estimate in 2013 to 4% in 2014 and 3.5% in 2015. Even though S&P expects stronger economy in 2014, higher returns on alternative investments are expected to make real estate investment less attractive in Germany.
Analysis of Germany Residential Property Market »
Munich is Germany’s high-cost leader, of course. A 120 square metre (sq. m.) apartment in Munich costs around EUR5,700 per sq. m., while in Berlin it costs around EUR3,300 per sq. m., and in Frankfurt, the same sized apartment costs around EUR3,600 per sq. m. while in
Berlin’s higher yields come on the smallest apartments, and are caused by the fact that very small apartments are relatively cheap to buy. So despite the fact that rents are the cheapest in Berlin, ranging from around EUR11 to EUR12 per sq. m. per month, returns on these small apartments are reasonable, at 4.77% to 5.09%.
In Frankfurt, rents range from around EUR14 to EUR16 per sq. m. per month. Apartments in Munich are the most expensive to rent, with rents ranging from around EUR16 to EUR17 per sq. m. per month.
Real estate investors, i.e., buyers of property for investment purposes, earn the highest rental return on their investment from apartments in Berlin or Frankfurt. Gross rental yields on apartment in Berlin came in first, because of those small Berlin apartments which earn as much as 5.09%. Gross rental yields in Frankfurt came in second, ranging from 3.60% to 4.85%. Rental returns for apartments in Munich range from 2.58% to 3.93%.
In terms of prices, both Berlin and Munich are up on last year.
All apartments included in the survey were located in the upscale residential neighborhoods of Berlin, Frankfurt and Munich.
Capital Gains: Properties held for more than ten years are not liable to tax on capital gains.
Inheritance: Inheritances are taxed at progressive rates, depending upon the relationship to the deceased, and the value of the inheritance. Spouses and children are taxed at progressive rates, from 7% to 30%.
Residents: The same tax system applies to residents and nonresidents except for various tax allowances and filing options e.g. joint returns.
Rents: While rents can be freely agreed, “exorbitant” rents can subsequently be appealed.
Rent increases are controlled, and cannot exceed more than 20% in nominal terms (less in real terms) over three years.
Tenant Security: Unlimited contracts are standard, effectively giving the tenant security of tenure. The tenant can object to the “ordinary notice”, and demand continuation, if termination of the lease would give rise to hardship for himself or his family that would be unjustified, even in the light of the landlord’s legitimate interests.
However in the first quarter of 2014, German economy exhibited its fastest growth in three years, as GDP rose by 0.8% from the previous quarter. Domestic demand and private consumption added 1.7 and 0.4 percentage points, respectively, to GDP in Q1 2014. Plant and equipment investment as well as construction investment also had their strongest levels in three years posting 3.3% and 3.6% growth rates, respectively. As compared to the previous year, GDP expanded by 2.5%.
Deutsche Bundesbank, Germany’s central bank, recently raised its 2014 growth forecast to 1.9%.
“Germany’s strengthened domestic economy as well as the ongoing improvement in the economic situation of the industrial countries and the gradual recovery of the euro area suggests that Germany will follow a robust growth path,” said Bundesbank president Jens Weidmann.
Germany’s unemployment rate was 5.4% in April 2014, or 2.3 million, in contrast to the euro area’s unemployment rate of around 11.7%.
In May 2014, Germany’s annual inflation rate reached its four-year low, rising by only 0.9% as compared to the previous year, according to Federal Statistical Office (Destatis). Recently, Bundesbank slashed its inflation forecast for 2014 from 1.3% to 1.1%. In June 2014, the ECB to cut its benchmark interest rate to 0.15%.
The Christian Democratic Union (CDU) and its sister party Christian Social Union (CSU), led by Chancellor Angela Merkel, won almost 42% of the vote and secured 311 seats in the cabinet in the September 2013 German federal elections. Merkel is Germany’s third postwar chancellor to win three elections, and the only euro zone leader re-elected since the 2010 euro crisis.
However, CDU’s preferred coalition partner Free Democrats (FDP) got less than 5% of the vote, and were denied seats in the Bundestag. This prompted the CDU to make a coalition agreement with the Social Democrats (SPD), forming a grand coalition.