Market in Depth

Germany's great house price boom continues!

Lalaine C. Delmendo | June 30, 2020

After five years of robust house price rises, Germany's housing market continues to grow even stronger. In a country where the housing market has historically been extraordinarily stable, this is a significant shift.

The reasons? decade-long economic growth, more than 1 million refugees, high work-related immigration, record-low unemployment, weak construction supply and low interest rates.

The German hedonic price index rose by 10.93% (10.32% inflation-adjusted) in May 2020 from a year earlier (hedonic indices attempt to compare like-for-like exactly, so are the best measure of house price trends), the highest price growth ever recorded for the month of May, based on Europace figures.

During the year to May 2020:
  • Apartment prices rose by 11.81% (11.2% inflation-adjusted), up from a y-o-y rises of 10.22% in May 2019 and 4.8% two years ago.
  • New home prices rose by 8.04% (7.45% inflation-adjusted), up from a y-o-y rise of 7.95% in a year earlier and 5.44% two years ago.
  • Existing home prices rose by 13.28% (12.66% inflation-adjusted), up from the annual growth of 8.91% in the previous year and 9.03% two years earlier.


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 seems that it is poised to escape again the fallout from the COVID-19 pandemic.

“We are sticking with our assessment that the house price cycle will sustain itself until 2022 at least,” said a Deutsche Bank in its German Property Market Outlook 2020 report. “There are two reasons for this: The first of these is the sluggish supply of new homes, with numbers having virtually stagnated in recent years. Secondly, the credit cycle jumped sharply in 2019, which could spark even more dynamic growth in house and apartment prices.

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.

Residential property transaction volumes in Germany rose by 7% to €20 billion (US$22.5 billion) in 2019 from a year earlier, according to JLL. It represents the second-highest transaction volume since records began.

Low construction activity is another reason for the continued increase in house prices. Housing supply is not keeping up with demand. In 2019, dwelling permits increased 3.8% y-o-y to 360,578 while dwelling completions rose by 2% y-o-y to 293,000 units, according to Destatis. Yet it remains insufficient, due to a rising urban population and surge of migrants. In the medium term, the country needs to build around 400,000 flats annually to prevent housing shortages in cities, according to HDB President Thomas Bauer.

The migration crisis has added to the pressure. According to the UN's High Commissioner for Refugees, Germany is hosting the fifth most refugees, at 1.06 million, compared to any other nation, and the most of any other developed Western country.

Germany house prices
But unlike the housing market, the overall German economy is now in recession. In Q1 2020, real GDP shrank by 2.2%, following a 0.1% decline in Q4 2019. It was the biggest quarterly drop since the 2008 financial crisis. But even before the coronavirus pandemic, Europe's biggest economy was already slowing. In 2019, the economy grew by a minuscule 0.6%, its weakest performance since 2013, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

The economy is projected to contract by 6.5% this year before returning to a 5.9% growth in 2021, based on figures from the European Commission.


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 »

ECONOMIC GROWTH

Economic recession

The German economy fell into recession at the start of 2020, with real GDP shrinking by 2.2% in Q1 2020 following a 0.1% decline in Q4 2019. It was the biggest quarterly drop since the 2008 financial crisis.

Even before the coronavirus pandemic, Europe’s biggest economy was already slowing. In 2019, the economy grew by a minuscule 0.6%, its weakest performance since 2013, amidst slowing domestic car industry and weak goods exports due to global trade tensions.

The economy is projected to contract by 6.5% this year before returning to a 5.9% growth in 2021, based on figures from the European Commission.

Germany GDP inflation
Germany is expected to post a deficit equivalent to 7% of GDP this year, following the introduction of a €130 billion (US$146 billion) stimulus package.In 2019, Germany posted a general government surplus of €49.8 billion (US$56 billion), its eight consecutive year in a row, based on figures released by Destatis, equivalent to 1.4% of the country’s GDP, from 1.9% in 2018 and 1.2% in 2017.

Germany’s unemployment rate was 6.1% in May 2020, sharply up from 4.9% a year earlier, due to the COVID-19 outbreak.

Germany’s annual inflation rate was 0.6% in May 2020, down from 1.4% a year earlier and the slowest pace since August 2016, based on figures from Destatis. Overall inflation rate is expected to slow to 0.3% this year, according to the European Commission.
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