Market in Depth

Despite the pandemic, boom continues strong

Lalaine C. Delmendo | July 07, 2021

Despite the global pandemic, Germany's long-running house price boom continues strong, thanks to low interest rates, weak construction supply, as well as the increased demand from more than 1 million refugees. In a country where the housing market has historically been extraordinarily stable, this is a significant shift.

The German hedonic price index rose by 11.12% (9.28% inflation-adjusted) during the year to Q1 2021, its 45th straight quarter of y-o-y rises, according to Europace figures. Hedonic price indices attempt to compare like-for-like exactly, so are the best measure of house price trends.

Quarter-on-quarter, nationwide house prices rose by 3.23% (1.33% inflation-adjusted) during the latest quarter.

By property type:

  • Apartment prices rose by 11.46% (9.61% inflation-adjusted) during the year to Q1 2021, slightly lower than the 13.61% increase registered in Q1 2020. In a quarterly basis, apartment prices rose by 4.02% (2.1% inflation-adjusted).
  • New home prices rose by 7.51% (5.73% inflation-adjusted) y-o-y and by 1.63% (-0.24% inflation-adjusted) q-o-q.
  • Existing home prices surged by 14.73% (12.83% inflation-adjusted) y-o-y and by 4.07% (2.15% inflation-adjusted) q-o-q.

The German housing market was one of the few that avoided a slump in the wake of the 2008-2009 global financial crisis. And now, it is poised to escape again the fallout from the COVID-19 pandemic. Strong house price rises are expected to continue this year, buoyed by low interest rates, as well as the prevailing supply shortage in major cities.

“More than €20 billion marks a new multi-year record high for the investment volume 2020,” said CBRE in its 2021 Real Estate Market Outlook report for Germany. “Activity in the German residential investment market can be expected to run at an uninterruptedly high level in 2021.”

This is supported by Deutsche Bank AG in its German Property Market Outlook 2021 report: “The cycle is likely to remain intact in 2021 thanks to the low interest rate environment, fundamental supply shortage and current undervaluation.”

Today's rapidly rising residential prices reflect a delayed response to a long period in which Germany has not built enough. After the mid-1990s there was a substantial drop in housing completions, in part caused by policy changes such as a rise in VAT from 3% to 19% in 2007, and the abolition of owner purchase subsidies.

From an annual average of 476,000 permits from 1992 to 1999, dwelling permits fell substantially to an average of 222,000 permits every year from 2001 to 2015.

However recent extremely low interest rates and bond yields have encouraged persistently growing demand, despite the fact that most German mortgage borrowers borrow on long-term interest rates, which are higher than “tracker” rates. In February 2021, the average interest rate for new housing loans was 1.17%, down from 1.28% a year earlier and 1.78% two years ago, according to Deutsche Bundesbank.

The migration crisis has added to the pressure. According to the UN's High Commissioner for Refugees, Germany is hosting the fifth most refugees of any nation, at about 1.1 million - the highest number of any developed Western country.

Germany house prices
Housing supply is not keeping up with this demand. Dwelling permits increased 3.8% y-o-y to 360,578 units in 2019 and by another 2.2% to 368,400 units in 2020, following y-o-y declines of 0.3% in 2018 and 7.3% in 2017, according to Destatis - insufficient to meet surging demand. The country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

During 2020, Germany's economy contracted by 5%, less than expected.  It was a smaller decline than the 5.7% contraction during the global financial crisis. The European Commission expects the German economy to grow by 3.2% this year and by another 3.1% in 2022.

Analysis of Germany Residential Property Market »

Rental Yields

Poor yields in Germany's big cities

Prices of houses and apartments in Germany continue to rise at a rapid rate.

Munich is Germany’s high-cost leader, with prices per square metre (sq. m.) from €6,000 to €10,000. The purchase price of apartments in Munich's prime residential districts is around €7,800 euros per sq. m.

Berlin is becoming increasingly expensive, with a price range of between €3,000 to €6,000, depending on locality.

Frankfurt is now about as expensive as Berlin.

How much will you earn?

  • In Munich a 120 sq. m. apartment can rent for around 2,250 euros a month, earning a yield of 3.5%.
  • in Berlin a 120 sq. m. apartment can rent for around 1,500 euros a month, earning a yield of 3.5%
  • in Frankfurt, a 120 sq. m. apartment can rent for around 1,700 euros a month, earning a yield of 3.7%.

These are extremely rough approximations; the table gives more accurate figures.

These are not high yields.

Wherever you buy, you are unlikely to have much problem letting your apartment. Especially at the lower end there is an acute shortage of affordable apartments as the German boom continues, sucking in workers from all over Europe.

Round trip transaction costs are moderate to high in Germany. See our Germany transaction costs analysis and our Residential property transaction costs in Romania compared to other countries.

Read Rental Yields »

Taxes and Costs

Rental income tax is high in Germany

Rental Income: Rental income is taxed at progressive rates, up to 45%.

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.

Read Taxes and Costs »

Buying Guide

Roundtrip costs are low to moderate in Germany

Roundtrip transaction costs are low to moderate at around 9.02% to 16.34% of the total price. Real estate transfer tax is levied at 3.5% to 6.5%, depending on the federal state where the property is located. Real estate agent’s fee is negotiable from 3% to 6%, plus 19% VAT.

Read Buying Guide »

Landlord and Tenant

German law is pro-tenant

German law leans signifcantly toward the tenant.

Germany propertiesRents: 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.

Read Landlord and Tenant »


Pandemic-induced economic recession

During 2020, Germany’s economy contracted by 5%, a smaller decline than the 5.7% contraction recorded during the global financial crisis, as massive government stimulus measures helped lessen the impact of the COVID-19 pandemic.

Even before the pandemic, Europe’s biggest economy was already slowing, with GDP growth of only 0.6% in 2019, a sharp slowdown from an annual average growth of 2% in 2014-18, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

Germany GDP inflation
The European Commission expects the German economy to grow by 3.2% this year and by another 3.1% in 2022.

Germany recorded a budget deficit of about €189.2 billion (US$228.9 billion) in 2020, the first shortfall since 2013 and the highest level since reunification in 1991, according to Destatis. As percent of GDP, the shortfall was equivalent to 4.2% last year. Public debt surged to 69.8% of GDP in 2020, sharply up from 59.7% of GDP in 2019 and the highest level since 2015, according to Eurostat.

Germany’s seasonally-adjusted unemployment rate was 4.5% in February 2021, up from 3.6% a year earlier, according to the Eurostat.

Germany’s inflation increased to 1.7% in March 2021, the highest since February 2020, according to figures from Destatis, as the temporary reduction of the VAT rates already finally ended. Inflation is expected to accelerate to 2.3% this year, from just 0.4% in 2020, according to the European Commission.