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How real estate in Germany has rocketed in the pandemic

Many industries have suffered in the pandemic, but Germany's real estate market is thriving, a new report shows.

Apartments in Hamburg's Eimsbüttel area.
Apartments in Hamburg's Eimsbüttel area. Photo: picture alliance/dpa | Marcus Brandt

While restaurant owners, retailers and cultural organisers have been feeling the burden of the pandemic in Germany, at least one sector of the economy has come through relatively unscathed: residential real estate.

The price dampener feared at the beginning of the pandemic did not materialise last year, in fact, quite the opposite happened: purchase prices increased at an above-average rate.

Since a low point in 2009, homes have more than doubled in cost. A report by the Council of Real Estate Experts (Immobilienweisen) presented earlier this week puts the price increase since then at 146 percent, reported German newspaper FAZ on Tuesday.

READ ALSO: The German cities where property prices are soaring

What did the report find?

In 2021, condominiums rose in price by an average of 14.3 percent nationwide, to €3,140 per square metre, according to the report. Compared to the previous year, the price increase has intensified: from 2020 to 2021, the increase was 11.2 percent.

Prices for homes in eastern Germany have recently risen more strongly than in the west. Large cities in the east – excluding Berlin – recorded an increase of 19.6 percent last year to a price per square metre of €2,621. In western cities prices rose by only 12.5 percent, although the level is also significantly higher at €4,096.

READ ALSO: Why Frankfurt could have the biggest housing bubble in the world

What about rents?

Rents also rose, but not at the same rate as real estate. According to the real estate experts group, they went up by 3.7 percent to an average of €8.46 per square metre. The authors of the survey observed the strongest increase (4.1 per cent) in asking rents in western German districts to €8.27.

In the so-called ‘A-cities’ – Berlin, Düsseldorf, Frankfurt, Cologne, Hamburg, Munich and Stuttgart – new leases rose by 2.7 per cent to an average of €12.27 per square metre.

Berlin continues to be an outlier, with asking rents rising by 4.7 per cent to €9.70 on average. The absolute front-runner is still Munich, with rents averaging a shocking €16.99 (plus 2.6 percent).

READ ALSO: Why rent prices in major German cities are starting to fall

The number of new-build flats in Germany is rising, but it’s not near the current targets.

Flats in Cologne.

Flats in Cologne. Photo: picture alliance/dpa | Federico Gambarini

After around 306,000 flats completed in 2020, the real estate report estimates the number of new-builds for 2021 to be 315,000.

Germany’s government has pledged to increase the annual number of new builds to 400,000 per year, but experts say that will be difficult to reach.

Housing is a major social problem in Germany, especially in cities. 

According to a study from last year, around 4.1 million households in Germany’s big cities have to fork out more than 30 percent of their net income on rent, including utilities and heating.

Among social scientists and real estate experts, a rent burden ratio above 30 percent of household income is considered problematic, especially for households with lower incomes.

Many landlords don’t allow people to rent a flat if they reach this threshold because they doubt that tenants can afford their flats long-term under these circumstances.

The study released in 2021 and funded by the Hans Böckler Foundation, also found that around 2.2 million households in the 77 major German cities have to spend at least 40 percent of their income on rent, and for just under 12 per cent – or almost one million households – more than half of their take-home pay goes on rental costs. 

On average, tenant households in large cities pay 29.8 percent of their income for gross ‘warm’ rent (rent including associated costs like electricity and gas).

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Should you think about purchasing a buy-to-let property in Germany?

Buying property in Germany specifically to rent out has increased in popularity over the last few years - even as overall home ownership remains low relative to the rest of Europe. So who should consider it here in Germany? We spoke to an expert.

Should you think about purchasing a buy-to-let property in Germany?

Buy-to-let properties in Germany come with many of the same pitfalls as buying a German property to live in yourself. For one, fees and taxes of around ten percent of the purchase price could dissuade plenty a buyer.

But according to Nick Mulder, CEO of Hypofriend, a mortgage broker specifically targeted to expats – there are four broad types of people who might want to have a look at the option.

They include people who might have cheaper rents in the city but simply cannot afford to buy the forever home they might want. As such, they may consider buying a small one – or one in a cheaper city – that they can rent out and use to supplement their income.

Other groups include people who intend to stay in Germany for at least ten years, people with incomes high enough to write off property depreciation against their taxes, and people looking to supplement their pensions with rental income.

EXPLAINED: What you need to know about buying property in Germany

What are the pros if I fall into one or more of these groups?

Mulder says one of the most important things for a buy-to-let purchase of a property in Germany is to be sure that you will hold it for at least 10 years.

That’s because once the 10-year clock runs out, you can sell it and pay no capital gains tax on it – even if the property isn’t your residence. In Germany, selling your main residence at no capital gain is possible after two years – but that option opens up with any property based in Germany you own after 10 years.

If it works, you can effectively claw back the high upfront fees and then some after ten years.

“This is unique globally,” says Mulder. “It can be very advantageous.”

That’s not the only advantage Germany seems to have over other countries. Another is the favourable financing terms. German mortgages tend to have the same terms and conditions for buy-to-let properties as they do for ones you buy as your own residence.

“This is uncommon in many countries,” says Mulder. Interest expense can also often be written off against taxes if you own a buy-to-let in Germany – something not available for people to do on their own residences.

The tax advantages can also be considerable, with recent tax changes meaning that some people will be able to deduct up to 40 percent of their German property’s value from their taxes in the first four to six years of owning it. Owners can deduct everything from the depreciation of the building’s value (but not the land) to energy-efficient retrofits.

In many cases, Mulder says the gains are still generally there for the taking if you move abroad in the meantime – provided the country of your new tax residence has a tax treaty with Germany. You just need to hold the German property for long enough to realise the tax advantages – to help offset the high upfront costs.

READ ALSO: Is it a good time to buy a home in Germany?

What are the cons?

Obviously, if you purchase a buy-to-let in Germany – you need to stay locked in for a while to make the high upfront fees – which include everything from land transfer tax to notary fees – worth it. House flipping after a few years doesn’t work here the same way as it might elsewhere – even for your own residence.

Maintenance can be an ongoing cost, which is why Mulder says they recommend that expat buyers buy up new buildings if possible.

Finally, with strong tenancy laws in Germany, rent is only likely to appreciate by two to three percent a year. This means the upside is largely taken when you eventually sell – not from rental income.

All that said, buy-to-let properties may make sense in Germany for certain types of medium to longer-term buyers – who can stick it out for a few years.

READ ALSO: What fees do you have to pay when buying a home in Germany?

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