Real Estate

Three rooms for one million euros – is that still justified?

Real estate prices in Germany keep rising, especially in the big cities the dream of owning a home is becoming unaffordable for many people. A price bubble appears to be forming. Or?

Deep windows with a view of urban life, a modern glass facade meets old brick walls. The chic new apartment with 80 square meters also offers enough space for a small family, and the eat-in kitchen invites you to spend sociable evenings with friends.

Isn’t that worth 1.1 million euros to you? Then it becomes difficult with self-employment in a metropolis like Munich – even good locations in Frankfurt or Hamburg are quickly becoming a long way off.

Real estate is becoming more and more expensive in Germany. Even in the pandemic year 2020, prices for condominiums and houses, especially in popular cities, only knew one direction: even further up.

According to a recent survey by the Immoscout 24 portal, the average price for a three-room apartment in Frankfurt’s Westend was around one million euros. In Hamburg, the most expensive district of Harvestehude is now also just below the limit of 900,000 euros for a comparable condominium.

The Bundesbank is alarmed

Can such prices really only arise through supply and demand, because too many people simply want to live in the same place? Or is speculation playing the decisive role here – has a price bubble long since emerged?

In any case, the Bundesbank has recently been alarmed. Although their experts do not use the word “bubble” directly in their mouth, they speak of “significant price increases” in their February report. Properties in major German cities are therefore too expensive by 15 to 30 percent.

But the assessment is also met with opposition. “We see no risk of bubbles at all,” says Jan Linsin, who heads the research department at real estate service provider CBRE. And also Michael Neumann, board member at real estate consultant Dr. Klein, views the Bundesbank’s percentages “with caution”. In an interview with t-online, he says: “People quickly speak of a bubble because there are no clear boundaries.”

Corona makes your own four walls more important

The fact is: Real estate prices in Germany are rising – and rapidly. Last year, prices in Germany rose by an average of 11 percent, according to Hypoport AG’s EPX house price index. Current studies by the real estate consultancy JLL even show local jumps of up to 17 percent in the second half of 2020. Industry expert Michael Neumann says: “The price that can be achieved on the market is fair.”

A new building in Berlin: There aren't enough apartments, especially in big cities. That drives prices higher and higher. (Source: imago images)A new building in Berlin: There aren’t enough apartments, especially in big cities. That drives prices higher and higher. (Source: imago images)

In fact, the exorbitant prices hardly seem to bother most prospective buyers. According to Immoscout 24, the demand for owner-occupied real estate rose by 33 percent in 2020 – despite, and possibly also because of, all the uncertainty caused by the pandemic.

An explanation according to Axel Schmidt from Immoscout 24: “In the Corona crisis, people have become more aware and more important about their home. The desire for more space and a bit of green has grown significantly.” The Bundesbank also sees similar motives in its report.

Too many people moving in, too little new building

In addition to this rather emotional argument for higher real estate demand, there are a number of hard factors that seem to justify prices. The most important one has been the same for years: too little is being built in the cities, there are too few new apartments for too many newcomers. “As a result, rental and real estate prices are rising and people are moving to the cheaper surrounding areas and driving prices up there,” says Linsin.

So it is not surprising that, according to JLL, the surrounding area of ​​the metropolises has also risen sharply in the past year. Neumann also sees a failure of politics here. “Instead of creating building incentives, some federal states have even increased the property transfer tax,” he criticizes.

And another government measure is likely to have strengthened the desire to have their own four walls recently – especially among young families: the Baukindergeld, which promotes the purchase of a house, could only be applied for until March 31st.

Low interest rates make real estate affordable

Another factor, on the other hand, is less in the consciousness of many people, but plays a decisive role: the European Central Bank (ECB) has kept interest rates at historic lows for years. This has a double effect:

On the one hand, financing the home purchase with credit is becoming more affordable for many people. On the other hand, interest rates ensure that other low-risk investments such as government bonds hardly generate any income, so that large investors prefer to park their money in concrete gold.

The second point in particular was very important in the Corona year. After the states have borrowed heavily to combat the pandemic, it is unlikely that the ECB will raise interest rates in the next few years. “There is an emergency in Germany,” says Neumann from real estate consultant Dr. Small.

Investors are driven by the new fear of inflation

Added to this is the increased fear of inflation, also triggered by the ECB: In order to provide the states with additional money in dealing with the crisis, the ECB is printing money on an even larger scale – which, it is feared, will sooner or later enter the economic cycle should find. There, in turn, it ensures that everything becomes more expensive and the money in the accounts is less valuable.

Investors are not even put off by the fact that rents are now rising more slowly than purchase prices – actually a hardly deceptive signal that a bubble is forming.

In the past, the rule of thumb was once again that buyers should have paid off their property through the possible rental income after 25 years at the latest, but now it is often more than 30 years, sometimes even around 40 years. Nevertheless, Gero Gosslar from the real estate association ZIA says: “Real estate as an asset class will remain an interesting and sensible investment in the future due to the lack of alternatives.”

Loose lending

For the owner-occupier, who is not just looking at the return on investment, the high prices are meanwhile becoming a problem. Hardly anyone can raise the required property prices without money from the bank. With the higher prices, the loan amounts with which the buyers go into debt also grow.

Some banks even offer 110 percent financing in metropolitan areas if the buyer has a permanent job. That means: the financing beyond the purchase price, i.e. the ancillary costs that arise when buying or building.

On average, the buyers themselves are looking for safety and not risk, explains Neumann. They started with more equity, secured historically low interest rates for an average of more than ten years and repaid a high percentage in order to quickly pay off their property: “German buyers are very cautious and that makes the German market stable.”

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