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Overview of the Current Real Estate Market in Germany
To this day, real estate prices in Germany have continued to grow since 2010. The Immobilienverband Deutschland (IVD) released a report in October of 2016 that evaluates residential buildings in 360 cities. In the first three quarters of 2016, real estate prices rose by 6% in comparison to the previous year of 2015, when this number was 5%.
There are two reasons for the rising cost of real estate in Germany.
1. More and more people are moving to urban areas, causing an imbalance in supply and demand.
2. Lower bank interest rates push capital flow into the real estate market, which is not halting the price increase.
This text will analyze the current investment environment in the German real estate market in 5 sections.
1. Clear increase in the price of portfolio property
In Germany's 14 largest cities with more than 500,000 residents, prices of mid-range portfolio properties rose by 9.42% from the previous year, whereas this growth only amounted to 7.46% in 2015. In cities with a population of 250,000 - 500,000, the price grew by 8.64%, while this number was only 5.48% in 2015. In rural areas with about 50,000 - 100,000 residents, the price increase slowed down while prices rose in other areas.
2. The Top Ten urban real estate prices
These are the 10 cities in Germany where the price of portfolio property grew most drastically in 2016: Frankfurt (18.92%), Cologne (15%), Stuttgart (11.32%), Bremen (10.64%), Essen (10%), Hamburg (8.7%), Munich (7.69%) Berlin (5.41%), Düsseldorf (3.69%), Dortmund (3.57%).
Frankfurt takes first place in this list because the price per square meter there was 2200 euros, equal to an increase of 18.92%. Munich takes seventh place with a price increase of 7.69%. This is not very extreme compared to Frankfurt, and yet nationwide it exhibits the highest price, as one square meter costs an average of 4200 euros. Essen is also worth mentioning, as it is actually not a very large city with a price increase of 10%, rightly landing it in fifth place.
3. The prices of new properties remain stable
The cost of new property in Germany increased by about 6% in the first three quarters of 2016. Compared to 2015, this is no major change. Price growth of new properties slowed greatly in some cities. Cities with 30,000 - 50,000 residents reported growth of 5.54%. This number was 7.1% in 2015. Price growth in cities with more than 250,000 residents is becoming increasingly palpable.
4. The affordability index for living space is at a record level
In spite of high real estate costs, the affordability index for living space (HAI) has reached its highest level yet. The affordability index for living space uses real estate prices, wages and bank interest to calculate the possibility of an average home with mid-range income to purchase a property in the middle price segment. If the calculated value is less than 100, it is clear that such a family can only purchase very cheap real estate; if it is over 100, it is assumed that such a family is able to purchase a new, larger property.
While this index was always short of 100 over the past 10 years, it was at 143 in 2016. This means that the affordability of real estate for a German family has greatly increased. The low interest rates and relatively strong wage increases have provided a type of security, whereby the average family has never been so capable of purchasing a house despite growing real estate prices.
5. Supply and demand are influencing rent costs
Despite the fact that the German economy is affected by the recession of the Eurozone and other factors, the evaluation by the three most important rating firms worldwide with regard to an ideal environment for investments has not changed. 43 million people, with their demand for living space, not only promote the rising real estate costs in Germany, but are also causing further growth in the real estate market. This is because residential development, contrary to strong progress in cities, is inactive. Because of this quick and ever growing demand for living space and the rising costs of water and gas, etc., German rental costs are increasing as a result of many factors. Bank interest rates are low, real estate prices and rent are high - from purchases to investments, right now it seems that Germany remains a stable investment opportunity.