Real Estate In 2022

Introduction: Real Estate In Germany

Investing in the German real estate market has been absolutely great for the last 10+ years. With rising property prices of 9,6% after inflation in 2020 and 14,2% after inflation in 2021, the property market in Germany experienced growth rates like never seen before. But new developments indicate that real estate in 2022 & going forward will be very different than German real estate in the past.

This article will perfinexplain what changed for real estate since 2022. All by comparing the 4 factors that matter most for a successful real estate investment:

Property price & cash flow generated by rent (= return on rent)
Mortgage interest rate & percentage of property value one can finance (e.g. 90% financing with 10% downpayment)

Most investors underestimate the influence mortgage financing conditions have on the property markets. The lower the mortgage interest rate, the more people will lend money. The higher the percentage of people who can get money from the bank, the higher real estate prices will rise. That’s because more people can invest in properties. Only when looking at the change of the 4 factors mentioned above, we can get a complete overview of the current state of the German real estate market in 2022.

German Property Market In The "Good Old Days"

When it comes to real estate in Germany, everybody is always talking about the good old days. The days when property prices were at historically low levels right after the global financial crisis of 2008. As buying properties was still considered risky at that post-recession time and everyone was afraid of the next recession (e.g. European debt crisis or Greece’s government bailout), the demand for properties was as low as ever before.

By the way: People in Germany were saying back in 2007 that property prices are “(too) high”. Because people are always saying that property prices are ” (too) high”.

The simple law of economics is that a low demand will result in low prices. Guthmann Estate GmbH, a real estate agency in Berlin proves this point with their market report on Berlin property prices. Before the global financial crisis in 2007, there were not a lot of properties on the market in Berlin. Square meter prices ranged mainly from 500€ – 2.500€. Good luck finding these prices now!

In 2022, the blue bar indicating 500€ – 2.500€ square meter prices is almost not existent anymore. The majority of Berlin property prices these days range from 2.500€ – 5.000€ or 5.000€ – 7.500€ per square meter. This is a result of the fact that more and more people went out to buy properties in Berlin (with the high in 2011) starting a few years after the global financial crisis – therefore driving up prices.

In statistics, the median plays always an important role as it cannot be manipulated as easily as the average can. According to the Guthmann market report, the median square meter price went up from 1.520€ in 2007 to 5.600€ in 2022. This can be seen in the chart above (dark blue line). That is an increase of median Berlin property prices of almost 270% over the 15-year period or a rate of return of 18% every single year.

The low property prices of the “good old days” resulted in a positive cash flow in terms of return on rent as rents have always been comparatively high in large German cities. With rental yields of sometimes up to 8%/year, investment properties generated a large amount of cash flow in the past. Today, investors are still looking for positive cash flow rental properties. These cannot find anymore, because the growth of property prices has outpaced the growth of rents.

Do investment properties with high rental yields of +6%/year still exist in Germany? They certainly do. It is mostly +100-year-old buildings that haven’t been renovated properly and are in the back end of nowhere. If you can find a tenant for these shacks, you might get a high return on rent if the renovation costs do not eat you alive. These properties are only for experienced real estate investors that know the ins and outs of the respective local property market & are willing to take a tremendous amount of risk.

Real estate in the “good old days” did not just offer great returns, the mortgage financing conditions were also perfect in terms of the percentage one could lend from the bank (loan-to-value). With a decent personal financial situation, it was very well possible to lend 120% of the property value (100% property + notary + real estate agent + taxes + renovations). The only negative of the “good old days” was the mortgage interest rate, ranging between 3% – 5% before the financial crisis.

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German Real Estate Before The Craziness In 2022

Because of the extremely favorable conditions for real estate investors mentioned above, a lot of people in Germany started to invest in properties. Therefore, driving up prices. The Guthmann report and the Postbank study find yearly increases in German property prices by 15% – 20%. This tremendous return started after the global financial crisis and went on until the beginning of 2022. Afterward, conditions changed because of rising inflation in the Euro area & the Russian invasion of Ukraine.

Rents could not keep up with the rising property prices. So, positive cash flow properties slowly went away and shifted to 0€ cash flow or even negative cash flow properties (=rent payment is not covering complete mortgage payment anymore). While some real estate investors were fine with negative cash flow (in order to increase their tax benefits associated with investing in properties), other investors were buying more and more risky properties in search of passive income from rental properties.

When investing in real estate in Germany, the following costs are tax-deductible:

Interest rate paid to the bank as part of the mortgage
Principal paid as part of the mortgage (as principal = savings, it is not tax-deductible)
Renovation costs to increase the value of the property
Depreciation / AfA (usually 2%/year for regular German properties)
Additional purchasing costs (notary, real estate agent, ground purchasing taxes)

100% financing (in terms of loan-to-value) was still possible before the war in Ukraine. Real estate investors needed only very little money for the additional purchasing costs to buy a rental property in Germany. While writing this article in August 2022, it seems likely that 100% financing will only be possible in exceptional cases. For example our GermanReal.Estate Community Token.

The major advantage of real estate before the craziness in 2022 was the historically low mortgage interest rate of 0,x%. This was never seen before in Germany or the Euro area. The lowest interest rate PerFinEx was financing for clients was 0,69% in the Summer of 2021. That was very well below the Euro inflation rate in 2021. So, real estate investors could basically borrow hundreds of thousands of Euros for free.

Real Estate In Germany In The Near Future

The conditions for real estate investments have changed massively, now. Compared to the near past or the past that is far behind us, what will happen to the German property market in the near future? Is the party over or is it finally time for affordable property prices again because the market is going to crash?

We have no glass ball to look into the future, but there is hardly any evidence supporting the fact that property prices in Germany will fall drastically in the near future. Some locations might fall or stagnate like they have done in the past (especially the C or D locations), but the overall German real estate market (especially the A and B locations) is likely to remain strong mainly for the following 2 reasons:

The cost of building properties is likely to continue rising in the near future. After a small decline at the beginning of 2021, the official building price index of the German statistical office found an increase of 17,6% in construction costs from May 2021 to May 2022. If the costs to build properties are rising in Germany, why would property prices fall at the same time?
Germany is not developing enough living space. In 2021, there were less than 300.000 new flats built in Germany. The “problem” is that Germany would need +400.000 flats. Just to satisfy the demand for living space (even without migration). The German news agency Welt suggests that up to 600.000 flats could be missing in 4 years if people also migrate to Germany (graphic below).

Aside from the facts given above that, it is very unlikely the German real estate market will crash in the near future, professional property developers like FiveRocks Development SE are continuing to have a positive long-term outlook on German property prices. Given that the property market is likely to remain strong, how are mortgage financing conditions in the near future?

Interest rates skyrocketed earlier in 2022 when the ECB announced they were looking to increase their key interest like the Federal Reserve. The continuous inflation because of the war in Ukraine also led to rising mortgage financing interest rates that were at almost 4% in early 2022. As of writing this article in August 2022, it seems like mortgage rates will stabilize at about 3%.

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Conclusion: Time To Buy A Property In Germany Now?

Even though it seems very likely that real estate in 2022 will be quite different than real estate in the “good old days” or real estate before 2022. Going forward, we are still confident that real estate is a good asset class to invest in. If we remember the fact that people in Germany have been saying for years and decades now that “real estate will crash” or “property prices are too expensive”. We also know that public opinion is often detached from facts in the real world.

When structured in the correct way, German real estate can still be a great investment as long as it suits your personal financial strategy. Especially if you do not expect an immediate positive cash flow or the tremendous returns of the past. Nevertheless, returns are still expected to beat savings accounts over the long term.

Do you agree with us that real estate is still a good investment in 2022? Let us know in the comments below.