While a lot of countries have had painful property bubbles, the German property market has not moved much, neither upwards, nor downwards. But lately, property prices in Germany have started to pick up. Is it a good time to invest in Germany? Here is an overview of the German real estate market.
While property prices in a lot of countries skyrocketed up to the global financial crisis, house prices in Germany did not increase much. But lately, the German real estate market has started to heat up. One reason is that people from southern and eastern Europe are buying property in Germany. For them, it is safer to buy real estate in Germany than in their home countries. If the eurozone breaks up, a new German currency will not lose as much in value as new currencies in southern Europe. For buyers from the east, the German government is much more reliable than the governments in their home countries.
But does it make financial sense to invest in German real estate nowadays? Well, first it is worth mentioning that it is only in some cities that property prices have gone up a lot. In rural areas, house prices have not gone up at all. So far foreign buyers have been focusing on Berlin, Hamburg and Munich. It is also in those cities that prices have increased the most.
Before you start to invest in real estate in Germany, it is well worth remembering that the population in Germany is actually shrinking. Even worse, the population is expected to decrease at least the next 30 years. In 2050 it is estimated that the population of Germany will be 65 millions, compared to today’s 81 millions. Since population growth is one of the main causes of increased property prices, the buyers of German real estate have to rely on other factors.
Like in all other countries, it is wrong talking about the German property market as it was one single market. In reality, there are a lot of different markets, in some places prices go up, in other places prices go down. If you are going to buy an investment property in Germany, it is crucial that you select the right location.
The former East Germany is still struggling and with the exception for Berlin, including Potsdam, the region is supposed to continue to struggle for quite some time. This means that proud cities such as Dresden and Leipzig are best avoided unless you really know what you are doing. Prices have gone up lately, typically about 5% per annum, and it is questionable if the fragile local economies will be able to support much higher prices.
The three largest cities in Germany, Berlin, Hamburg and Munich, have been growing despite that the population in Germany is shrinking. The property prices in the three cities have also been growing quite a lot. Munich has been the most expensive city in Germany for many years but the prices are still going up, albeit a little bit slower. Property in Berlin used to be cheap but in 2009 the market started to take off and prices have increased a lot. The boom in Hamburg started earlier than in Berlin and prices have increased a lot the last ten years. While all three cities offer relatively good capital growth, the rental yield is typically poor. As an investor, you need to tread carefully.
For investors who are looking for reasonable yields, it is best to focus on other cities than Berlin, Hamburg and Munich. There are several cities that are growing but there prices have not increased as much as in the big three. But once again, do your homework, some German cities are struggling and property prices will most likely not increase much more than inflation.
At the moment, cities such as Frankfurt am Main, Cologne, Stuttgart and Ulm are offering reasonable yields combined with relatively good chances of capital gains. But as mentioned earlier, you have to known the local market, otherwise you could easily end up paying too much for the wrong property.
As mentioned, property prices in Germany have increased a fair bit after the global financial crisis. A lot of people see Germany as a safe haven and don’t worry too much about the price. Many German investors are worried that capital gains will be small the next couple of years. But few are worried about a housing bubble, prices are high but still reasonable in most places. It is also worth remembering that German banks don’t lend money as easily as banks in the English-speaking world have done. This together with the shrinking population in Germany makes the German property market quite tricky for investors looking for good opportunities.