
Is there a real estate price bubble in Germany?
It's a simple calculation: if purchase prices for real estate rise faster than rental prices, there is a risk of a price bubble. This is because real estate prices then become decoupled from income.
In recent years, purchase prices have skyrocketed in many German cities and regions. In Munich, Germany's most expensive city, for example, purchase prices for single-family homes rose by 240 percent between 2008 and 2018. Nevertheless, Munich is not yet among the frontrunners when it comes to the risk of a bubble – after all, rents here are rising like in no other German city. An analysis by the consulting firm Empirica rates the risk of a bubble in Munich as rather high. In other German districts, however, it is considered critical. According to the German Bundesbank, prices in Munich are overvalued by around 39 percent. However, the frontrunner is not a metropolis, but a rural region: in North Frisia, prices are overvalued by almost 54 percent. This is mainly due to the fact that the expensive holiday islands of Sylt and Amrum belong to North Frisia.
But the risk of a bubble is often critical in other rural regions as well. These include, for example, the Bavarian districts of Unterallgäu and Schwandorf. Many new apartments have been built here in recent years. While space for new construction is limited in metropolitan areas, there are many potential building sites in rural regions. This means that high demand can also be met.
It is also important to consider the development of rental and purchase prices in relation to the development of average incomes. Due to the current low interest rates, many people are taking advantage of the opportunity to finance a property with a favorable loan that they would not have been able to afford under other circumstances. Many foreign investors have also been attracted to the German market.
If the European Central Bank raises its key interest rate, there is a risk that buyers will not be able to pay their follow-up financing. However, most purchases in Germany are relatively solidly financed, according to the authors of the DIW study in Spiegel Online.
In cities such as Munich, where rents are also rising sharply, there is a risk of a bubble, especially if the influx of new residents slows or people move away from the metropolitan areas because they can no longer afford the rent.
However, price growth in metropolitan areas slowed last year. The DIW study therefore assumes that the risk of a price bubble will fall to 84 percent by the end of the year. Is now the right time to sell your property before prices fall? Contact us now. We will be happy to advise you.
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