Despite the ongoing global pandemic, residential real estate values in Germany continued to remain high and yields attractive to investors in the first half of 2022, thanks in part to low interest rates, a weak construction supply and increased demand from more than 1 million refugees. In a country where the housing market has historically been extremely stable, this is a significant shift.
According to oldypak capital lp property 2022 report, Germany’s hedonic home price index rose 11.12% (adjusted for inflation of 9.28%) over the past 12 months. Hedonic price indices are an attempt at accurate cost comparisons, so they are the best measure of trends in the value and yield of residential real estate in Germany.
Quarterly residential property prices in Germany rose 3.23% (1.33% inflation-adjusted) in the first three months of the year.
The change in the country’s home values by type of residential property:
Value growth was 11.46% (9.61% adjusted for inflation) in the 12 months through the first quarter of 2022, slightly below the 13.61% increase reported in the first quarter of 2020. On a quarterly basis, average apartment prices rose 4.02% (2.1%).
New home values rose 7.51% (5.73% inflation-adjusted) by 1.63% (-0.24%) on a quarterly basis.
Secondary market home values increased 14.73% (12.83% inflation-adjusted) and 4.07% (2.15%) over the quarter.
We provide a breakdown of the growth in average home values in Germany over the past 10 years in the table below.
German housing market development
The German residential housing market was one of the few that managed to avoid the downturn after the global financial crisis of 2008-2009. And now it is ready to avoid the consequences of the COVID-19 pandemic again. Housing values are expected to continue to rise strongly this year, aided by low interest rates as well as a prevailing shortage of supply in major cities.
“More than 20 billion euros is a new multi-year record for investment volume in 2020. In 2022, activity in the German residential real estate investment market can be expected to be consistently high,” according to the CBRE report “German Residential Real Estate Market Outlook 2021.”
Deutsche Bank AG also confirms this in its “German Residential Real Estate Market Outlook to 2021” report: “The cycle is likely to remain unchanged in 2022 due to the low interest rate environment, fundamental supply shortages and current undervaluation.”
Today’s skyrocketing housing prices reflect a delayed response to a long period in which the FRG did not build enough. Since the mid-1990s there has been a significant decline in the number of housing projects completed, in part due to policy changes such as the VAT increase from 3 percent to 19 percent in 2007 and the elimination of home purchase subsidies.
From 1992 to 1999, an average of 476,000 housing permits were issued per year; from 2001 to 2015, permits dropped significantly to 222,000 permits annually.
But extremely low interest rates and bond yields over the past few years have stimulated ever-increasing demand, even though most German mortgage borrowers borrow at higher long-term interest rates. According to Deutsche Bundesbank, the average interest rate on new home loans in February 2022 was 1.17 percent, up from 1.28 percent a year earlier and 1.78 percent two years ago.
The migration crisis has added to the pressure. According to the Office of the United Nations High Commissioner for Refugees, Germany has the fifth highest number of refugees of any country – about 1.1 million – the highest of any developed Western nation.
The supply of housing has not kept up with this demand, so its cost is rising and yields are falling. Residential construction rose 3.8% to 3,60578 units in 2019 and another 2.2% to 3,684,000 units in 2020, after declining 0.3% in 2018 and 7.3% in 2017. But that’s not enough to meet growing demand. According to German housing market experts, the country needs to build about 400,000 apartments annually to prevent a shortage in cities.
During 2020, the German economy contracted by 5%, less than expected. This was a smaller decline than the 5.7 percent contraction during the 2008-2009 global financial crisis. The European Commission expects the German economy to grow by 3.2% this year.
Moderate rental yields on residential real estate in Germany
Rental yields on residential real estate in Germany are low to moderate, partly because of recent strong price increases, but more importantly because housing investments (including for rentals) used to be heavily subsidized by tax breaks. According to Eurostat, many Germans live in rental housing, and only 51% of all German families own their homes.
According to oldypak capital lp property 2022 report, rental yields range from 3.5% to 3.7% in Germany’s major cities:
In Munich, a 120-square-meter apartment can be rented for about 2,250 euros per month with a 3.5% yield.
In Berlin, an apartment of 120 square meters can be rented for about 1,500 euros per month with a yield of 3.5%.
In Frankfurt, a 120 square meter apartment can be rented for about 1,700 euros per month with a yield of 3.7%.
Although rents continue to rise, they have barely kept up with price increases. Rents on existing contracts rose 121.6 percent from 1990 to 2020, and rents on new contracts rose 85.9 percent. On the other hand, according to BulwienGesa, average condo values have risen 145.5% and townhomes have risen 129%.
Variations in home values
In Northeast Germany:
In Berlin, apartment values continued to rise (7.2%) during 2020 to an average of €4,743 per square meter. The average price of one- and two-family homes rose 12.3 percent to 3,350 per square meter.
In Hanover, the price of German residential real estate rose 8.1 percent to an average price of €2,877 per square meter during 2020. Similarly, the average price of one- and two-family homes increased by 11.2 percent to 2,455 euros per square meter.
In Dresden, apartment prices rose a modest 4.1 percent to 2,926 euros per square meter, while single- or two-family homes reached 2,735 euros per square meter (+9.3 percent).
In Hamburg, the price of apartments rose to 4,750 per square meter (+9.5%). Single- and two-family homes rose +11.3% to 3,282 per square meter.
In West Germany:
Dortmund had the highest increase in the average price of German residential property, rising 12.4% to 2,071 euros per square meter. Prices for one- and two-family homes also reached 2,512 (+11.1%) during 2020.
In Cologne, the average apartment price rose 10.6 percent to 3,609 per square meter. One- and two-family homes reached 2,881 per square meter (+10.2%).
In Düsseldorf, the average apartment price rose 6.9% to 3,338 per square meter, while the average price for one- and two-family homes reached 2,944 euros per square meter (+7.5%).
In Southern Germany:
In Munich, the average price of German residential property reached 7,882 euros (+ 5.1%) per square meter. Prices for one- and two-family houses rose +6.4% to €5,806 per square meter over the same period.
In Frankfurt, apartment prices were 4,138 per square meter (+5.5%). Prices for one- and two-family homes increased +10.4% to 3,210 per square meter during the same period in 2020.
Stuttgart had the strongest increase in apartment prices in Southern Germany compared to the same period in 2020, up +7.3%, with an absolute figure of 4,037. On the other hand, the average cost of one- and two-family houses was 3,782 per square meter (+10.6%).