Munich has been the most expensive city in Germany for a quite some time. A booming economy has meant that the city has grown quickly. The result is a tough real estate market, both for buyers and tenant. Demand has and is still outstripping supply, which has resulted in both higher prices and rents.
A lot of experts were surprised by the sharp increases of property prices in Munich during 2011 and 2012, almost ten percent per year in most parts of the city. Given that prices were already very high and that rental yields were very low, the prices increases were surprising. On the other hand, Munich is still growing and nothing has been done about the chronic shortage of housing. But for investors, the latest price increases have meant that the already low rental yields have become even lower, now about three percent. And we are talking about gross yields, after expenses, the yield will be even lower.
A lot of people see Munich as a safe place for property investments. The city has limited space for growth, new developments are expensive and far between. At the same time, the city has prospered and grown very quickly. And it looks like the growth will continue, at least the next couple of years. Not only have a lot of German property investors pushed up prices in Munich. With the economic problems in many countries in Southern Europe, people worried about the future of the euro have decided that Germany and especially Munich is a safe place for investments. Also people from Eastern Europe and Russia have bought property in Munich.
With the latest price increases, it does not really make sense financially to invest in Munich. Property prices are simply too high at the same time as rents, although by far the highest in Germany, are too low to make the return on investment reasonable. In Germany, rent increases are limited by the law so it will take time to before the rents have increased significantly. As mentioned, the gross yield is about three percent in Munich at the moment. Although interest rates and inflation are low, the yield does not really justify any investments.
So why are property prices still going up in Munich? The answer is that virtually nobody believes that house prices will go down. Most experts believe that prices will continue to increase, albeit at a more moderate pace, around five percent. This is still believed to be higher than what rents will increase, meaning that the poor rental yields will not improve. Munich is the right place for property investors who want safe long-term investments and who are not dependent on short-term cash flow. But most likely you can get better return on your investment in most other places, especially if you want a reasonable cash flow.
As mentioned earlier, there is not much free space left for property developments in Munich. The chronic shortage which has been a problem for more than 20 years, is unlikely to change, at least not for the better. There is not any really bad parts in Munich that must be avoided. But be aware that in many parts of the city, rents are already so high that even households with two incomes have trouble affording the rent. And this even if both have well paid jobs! Like in most other cities, places close to an underground or S-bahn station will always be popular. But don’t waste your time looking for bargains in Munich, there hasn’t been any the last 20 years.