Customers and clients keep asking about real estate prices and whether the right time has not yet passed.
My deep conviction: The best time to buy real estate was ten years ago and today. And that is true. According to a representative Forsa study, around 70% of households say they want to invest in real estate and if two-thirds of the population want to invest in real estate, then you can imagine that this has an impact on prices. Related to this is a topic that is less often discussed: the so-called affordability index. A metric used to show how affordable a particular good or service is to consumers. In the context of the real estate market, the affordability index is often used to indicate how easily homes can be purchased by average households. For residential real estate, the affordability index usually takes into account factors such as average house prices, average incomes of the population, mortgage interest rates and other relevant financial variables.
The index then indicates how easy or difficult it is for the average household to buy a home based on these factors. A high affordability index indicates that buying a home is affordable to the general population, while a low index indicates that the real estate market may be less accessible. It is important to note that local factors, economic conditions and mortgage rates can affect the affordability index. On a sober note, the index is a useful tool for understanding trends in the real estate market and gauging potential impacts on homeownership rates and the broader economy. A shift in the index may indicate that the dynamics of the real estate market are changing, and it is regularly monitored by economic and real estate analysts.
For many years, German media have been emphasizing that real estate in Germany is no longer affordable for many people. This reflects the public perception and discussion about real estate prices in the country. The German Real Estate Association (IVD) regularly compiles an affordability index for German real estate. This index serves to provide objective data to assess the affordability of real estate in Germany in real terms. The IVD looks at various locations, including average German locations compared to the top 7 German cities (A-locations). This differentiation enables a differentiated analysis of affordability in different regions of the country. In order to provide as objective an assessment as possible, the IVD takes various types of property into account. This can include apartments, houses and other types of property in order to capture affordability in different segments of the real estate market. By considering different locations and property types, the IVD is able to provide as objective a view as possible of the affordability of German real estate. This data can help to promote objective discussions about the current situation on the real estate market.
The IVD distinguishes between existing and new apartments as well as terraced and detached houses. This differentiation helps to capture affordability in different segments of the real estate market. The current realistic interest rate for real estate financing over 30 years and the development costs (notary fees and land transfer tax) are included in the calculations. The net household income of full-time employees with the average German salary forms a basis for assessing affordability. Since 2010, the IVD has been using its affordability index to record various property types in up to 285 locations in Germany. An affordability rate of less than 25% is considered affordable by the IVD. The detailed results, including for existing apartments, new-build apartments, terraced houses and detached houses in average German locations compared to the top seven cities, provide a sound basis for a comprehensive analysis of the current situation on the German real estate market.
Since the IVD affordability index was first published in 2010, real estate prices in average German locations have experienced a steady rise. Existing apartments, which were still priced at around €90,000 back then, now cost an average of €230,588, which corresponds to an impressive increase of 156%.
However, the question of the affordability of these average existing apartments is answered by the IVD affordability index. Despite the significant price increase, the index stands at 13.3%, which means that people are still spending around 13.3% of their net income on financing their home. The affordability challenges are particularly dynamic in the top 7 cities, the so-called A-locations. Here, real estate prices are not only significantly higher compared to average German locations, but have also experienced a substantial increase in recent years. The price range for existing apartments extends from €275,616 in Berlin to €583,025 in Munich. Despite these price differences, properties in the top 7 cities remain largely affordable according to the IVD affordability index. The index for all cities except Munich is 21.2%, which is below the 25% mark. Düsseldorf stands out as particularly affordable among the top 7 cities with an affordability rate of 19.1%.
To the point
The prices for new-build apartments differ considerably from those for existing apartments, particularly in average German locations. The difference amounts to a considerable €105,000 (€230,588 for existing versus €335,156 for new build). The question of whether to opt for a new or an existing apartment therefore becomes a personal budget decision. Despite the price difference, new-build apartments in average German locations are still affordable with an index of 19.9%. The affordability index has risen from around 16% to 19.9% in the last six years, indicating a moderate increase. However, the trend suggests that new-build apartments in average German locations could soon reach the IVD's 25% threshold.
In Germany's top 7 cities, real estate prices for new-build apartments are particularly heterogeneous. Düsseldorf stands out as an exception at €361,506, while cities such as Stuttgart at €517,190 and Munich at €721,008 occupy the top positions. In Munich, apartments in the city center can sometimes cost up to €20,000 per square meter.
The affordability of new-build apartments in the top 7 cities varies. Six of the cities exceed the IVD's 25% threshold, with Düsseldorf having a low affordability rate of 22.8%. Munich once again stands out as the most expensive city in Germany, with an affordability index of 38.6%.
What does this mean at the bottom line? Regardless of the type of property, Munich is undisputedly the most expensive city for renting and buying real estate in Germany. Compared to new-build apartments, terraced houses in average German locations are surprisingly inexpensive, only €67,000 more than apartments. The price of terraced houses has more than doubled from around €200,000 to €401,955, which is just over half the price of a new apartment in Munich. The outstanding yield of terraced houses in average German locations is reflected in an affordability index of 23.8%, which is very close to the IVD threshold. It is predicted that if prices continue to rise, terraced houses will soon no longer be affordable according to the IVD. While terraced houses in average German locations are priced at €401,955, prices in Munich reach almost €1 million. At around €600,000, prices in the top 7 cities are around 50% higher than the average location (except Düsseldorf, Frankfurt and Cologne). For the first time, all of the top 7 cities exceed the 25% affordability threshold of the IVD, with Munich being the most expensive city at 52.7%. This means that the average household in Munich spends 52.7% of its net income on financing alone. The most expensive type of real estate in Germany is single-family homes. In average German locations, a detached house costs €514,905, almost €115,000 more than a terraced house.
What´s new?
For the first time, the affordability of an average German location breaks through the 25% barrier of the IVD. A single-family home requires exactly 30% of the net income of the average earning household for financing alone. Berlin is an exception among the top 7 cities, where single-family homes are cheaper than the average (€514,905) at €469,710. However, single-family homes in the top 7 cities are no longer affordable for the average-earning household. Munich tops the list with an affordability index of 73.6%, while Berlin is the "most affordable" city at 37.4%.
From the perspective of a Parisian or Londoner, Berlin still appears to be a comparatively affordable capital in terms of residential real estate prices. According to a study by management consultants Deloitte, the average price per square meter for a new condominium in Berlin was 41 percent higher than the national average. In comparison, prices per square meter in Paris are almost three times higher than the French average. Nevertheless, the European comparison shows that Berlin can no longer necessarily be regarded as a bargain metropolis. In some capital cities such as Brussels, Vienna or Rome, buying a home is now cheaper than on the Spree. However, the most expensive major German city is not Berlin, but Munich. This puts the Bavarian capital in second place behind Paris in the European city rankings. There is one main reason why Germany is closer to the top of the European league table for house prices than Berlin is compared to other capital cities: Germany has many economically strong regions with high real estate prices, which means that the differences between the capital and the rest of the country are smaller than elsewhere. Nevertheless, real estate prices in Germany have a lot of catching up to do, as they are too cheap by international standards.
And now let's take a concrete look at the comparison between a rented property purchased 20 years ago and one that I can purchase today. Two decades ago, one of our clients bought an apartment for 200,000 euros. This involved costs for bank interest, ancillary costs, repairs, reserves and administrative expenses. We focus exclusively on managed properties, paying 15 euros net for efficient management so that the customer does not have to take care of it themselves and can instead use the time for vacations or other pleasures in life. Twenty years ago, the monthly costs for such an apartment amounted to around 1,500 euros, with 700 euros coming back via the tenant and the tax office. The customer therefore paid 800 euros, and the factor was 2.
Now let's look at a current example. Over the last 20 years, real estate in Germany has seen an average price increase of 70%, which is why a comparable apartment today costs 350,000 euros. Although interest rates are slightly higher than 2 years ago, they are still lower than 20 years ago. In addition to interest, there are costs for repayments, ancillary costs, repairs, reserves and administration. The average monthly costs for such an apartment amount to 1,800 euros. Rents in Germany have risen significantly over the last 20 years and the tax benefits are currently at an all-time high.
Recently, the tax benefits for most top properties were increased by 50%. And the additional new depreciation through the Growth Opportunities Act has not yet been taken into account here. Today, this property generates a monthly income of 1,400 euros via the tenant and the tax office, so your own burden is 400 euros. Nowadays, you only pay a fraction of what you paid 20 years ago for a rented property. The factor is now 4, and the creation of investment properties in Germany has improved by 100%. This offers an ideal time to get in.
It is correct that real estate prices have risen, but the burden on investment properties has fallen over the same period. This makes the investment property market extremely attractive today. Therefore, the decisive question is not the value of the property, but how high the effective monthly outlay is. All scientific studies and analyses on this topic clearly show that a rented property today costs around a quarter of what our grandparents or parents paid. Once again, the decisive factor is not what the property costs, but what you actually pay.
This also highlights the major advantage compared to owning your own property. While you have to finance 99.9% of your own property yourself, when you buy a rented property, the tenant and the tax office will support you to the tune of 70 to 80%. And the pressure on the real estate market, with a shortage of over 800,000 apartments in Germany and rising, will not change this in the next few years. Now is therefore one of the best times to buy owner-occupied real estate in Germany.
Kind Regards
Matthias Holzmann
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