Market in Depth

German house prices are accelerating!

Lalaine C. Delmendo | November 03, 2018

After almost four years of strong house price rises, Germany's housing market remains very strong. In a country where the housing market has historically been extraordinarily stable, this is a significant shift. The reasons? Strong economic growth, 1.1 million refugees, high work-related immigration, record-low unemployment, weak construction supply and low interest rates.

The German hedonic price index rose by 7.29% (4.89% inflation-adjusted) during the year to end-Q3 2018 (hedonic indices attempt to compare like-for-like exactly, so are the best measure of house price trends), based on Europace figures. Quarter-on-quarter, the index increased 2.27% (1.54% inflation-adjusted) during the latest quarter.

During the year to Q3 2018:
  • Apartment prices rose by 7.55% (5.15% inflation-adjusted), up from y-o-y rises of 3.89% in Q2 2018, 5.82% in Q1 2018, 6.18% in Q4 2017, and 7.4% in Q3 2017.
  • New home prices rose by 5.9% (3.53% inflation-adjusted), after y-o-y rises of 5.25% in Q2 2018, 5.92% in Q1 2018, 3.38% in Q4 2017, and 5.28% in Q3 2017.
  • Existing home prices rose by 8.65% (6.23% inflation-adjusted), after a y-o-y rises of 8.94% in Q2 2018, 6.06% in Q1 2018, 4.69% in Q4 2017, and 6.1% in Q3 2017.

The German housing market was one of the few that avoided a slump in the wake of the 2008-2009 global financial crisis.

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 surged by 19% to €8.8 billion (US$10 billion) in the first half of 2018 as compared to the same period last year, according to Savills.

Low construction activity is another reason for the continued increase in house prices. Housing supply is not keeping up with demand. In 2017, dwelling permits dropped 7.3% y-o-y to 347,882 while dwelling completions increased by just 2.6% y-o-y to 284,800 units, according to the German Federal Statistical Office (Destatis). During the first eight months of 2018, the number of dwelling permits issued rose slightly by 1.9% to 234,400 compared to the same period last year.

Recently, the migration crisis and strong economic growth have added to the pressure.

Despite the price rises, Deutsche Bundesbank, Germany's central bank, has ruled out the existence of a full-blown property bubble - at least not yet.

“The good news is that there is currently no real estate bubble that threatens financial stability in Germany,” said Bundesbank's chief banking supervisor Andreas Dombret. “But the traffic light is clearly on yellow.”

This view is supported by Michael Voigtlaender of Cologne Institute of Economic Research. “Rising prices on their own aren't enough to create a bubble - you have to look at the fundamentals,” said Voiglaender. “We have a stable mortgage market with steady equity ratios, and fairly moderate levels of home construction.”

Germany house prices“Market crashes are typically caused by too much construction, and the opposite is true in many German cities,” Voigtlaender added.

Germany's economy expanded by 2.5% in 2017, the strongest rate in five years, according to the International Monetary Fund (IMF). Then in Q2 2018, the economy grew by 1.8% y-o-y and 0.5% q-o-q – marking the country's sixteenth consecutive quarter of growth – the longest period of uninterrupted growth since the reunification. Both the IMF and the European Commission expects the German economy to expand by 1.9% this year and in 2019.

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 »


German economy remains strong

Germany GDP inflationGermany’s economy expanded by 2.5% in 2017, the strongest rate in five years, according to the International Monetary Fund (IMF). Then in Q2 2018, the German economy grew by 1.8% y-o-y, up from a growth of 1.5% in the previous quarter, thanks to strong domestic demand despite global trade tensions, according to Destatis. Quarter-on-quarter, the economy grew by 0.5% in Q2 2018 – marking the sixteenth consecutive quarter of growth in Europe’s biggest economy – the longest period of uninterrupted growth since the reunification.

Both the IMF and the European Commission expects the German economy to expand by 1.9% this year and in 2019.

In 2017, Germany posted a budget surplus of €36.6 billion, its fourth consecutive year of surpluses and the highest level since reunification. The surplus was equivalent to about 1.1% of the country’s GDP last year. Then in the first half of 2018, Germany achieved another record budget surplus amounting to €48.1 billion.

Unemployment remains low. Germany’s unemployment rate was 3.4% in September 2018, down from 3.6% a year earlier and far below the entire euro area’s unemployment rate of 6.7%, according to Eurostat.

Germany’s annual inflation rate was 2.4% in October 2018, up from 2.2% in September 2018 and the fastest pace since February 2012, according to the Destatis. Overall inflation rate is expected at 1.7% this year, unchanged from a year earlier but sharply up from an annual average of 0.4% from 2014 to 2016, according to the European Commission.