Dull housing market conditions

Germany’s property markets remain in the doldrums, much less vibrant than those in the rest of Europe. Property prices increased by a marginal 1.2% in nominal terms in 2006; however, in real terms, prices actually fell by 0.33%.

Property prices in 2006 at their 2000 level in nominal terms. In real terms, property prices have dropped by 7% from 2000 to 2006. Prices are expected to continue to stagnate this year.

Oversupply is largely responsible for the stagnant real estate market. Tax write-offs for the construction of large-scale rental dwellings increased supply, keeping prices low. Between 1995 and 1997, about 560,000 dwellings were completed annually. There was then a reduction; 216,000 dwellings were completed in 2003, another 239,000 units were completed in 2005, and 278,000 units in 2004.

Bad investments

A lot of investment in Berlin and the so-called Neue Bundesländer (New Federal Countries) has turned bad. Rents calculated as the basis of the investments were not attained, and whole buildings stood empty for long periods, despite their high quality.

At the same time the real estate market in much the former West Germany remained stagnant for much of the nineties.

However, in 2003 owner-occupied apartment prices in South-Western Germany, especially in smaller cities, began to recover. But the housing market has turned around only in the most economically successful cities.

Munich prices have been rising, and the city now has perhaps the highest per square metre apartment prices in Germany. Frankfurt is also in positive territory. Other interesting cities for investment are Hamburg, Essen, Cologne, Stuttgart, Berlin, and Hannover.

Most sought after are „Altbau“; buildings constructed at the beginning of last century and between 80-100 years old. If these houses are modernized, they are unique with their high ceiling levels at about 3.20 to 4.00 metres (buildings since about 1950 have ca. 2.50 metres room height).

Rent decline

Over the last decade rents have been stagnant or have fallen. Rents today are still 13% lower in nominal terms than at their 1994 peak, and have declined very significantly in real terms.

However, the fall in rental levels has been less than the decline in property prices, leading to higher yields.

Rental yields in small flats in Berlin (30 – 75 sq. m.) are generally higher than other sized units, at 7% - 7.35%. Bigger properties have yields at 5% to 5.5%. Rental yields for Frankfurt flats range from 5% to 6.6% while Munich flats have lower yields, at 4.4% to 4.6%.

More Germans live in rented accommodation than in their own homes. About 58% of households are renters, one of the highest proportions in the world. Private landlords own about 46% of the housing stock, social housing is around 6%, and co-operative rentals are around 6%.

Aside from the oversupply, weak demand has been pulling the housing market down. The unemployment rate has been going down but it was still at 9.1% in May 2007 (the lowest rate in more than 5 years). Even more alarming is the 15.2% unemployment rate in East Germany.

A more serious long–term threat to the housing sector is the declining and ageing population. By 2030 the share of old people is expected to peak. Retired people relying on their shrinking pensions are not likely to buy new houses or to move to better flats.

A more serious long–term threat to the housing sector is the declining and ageing population. By 2030 the share of old people is expected to peak. Retired people relying on their shrinking pensions are not likely to buy new houses or to move to better flats.