Germany Housing Market and Mortgages

13th Jan 20
Islay Robinson GROUP CEO

Islay Robinson

Germany Housing Market and Mortgages

Islay Robinson

Germany housing market has been extremely buoyant especially when you bear in mind the economic challenges facing Europe and especially Germany. While many EU leaders continue to play down the potential impact of Brexit on the EU economy, this is a real threat for the likes of Germany. However, the German property market continues to thrive while the economy flirts with potential recession.

So, what are the main factors driving the German mortgage and property markets and will this relatively strong performance against the economy continue through 2020?

German economy

German economic growth has been rather erratic in recent times. While the country managed to avoid a recession in 2019 we have seen a number of downgrades with regards to forecasting economic growth over the next few years. Obviously, the German economy is extremely important when it comes to the property market therefore investors will be watching this very carefully.

The Kiel Institute for the World Economy has reduced German economic growth forecasts for 2020 from 1.6% down to just 1%. The forecast for 2021 has also been slashed to around 1.4% although there is quite a variance across forecasts from different institutions. However, there is no doubt ongoing Brexit negotiations, and concerns about an EU/US trade deal, are causing issues.

Against the backdrop of indifferent economic growth, many will be surprised to learn that German unemployment is now near record lows. The figure now stands at just over 3% although if Germany tipped into recession, or there was a further slowdown in economic growth, this would obviously put future jobs at risk. As a consequence, some experts believe that German unemployment will start to increase in the short to medium term.

We have seen significant volatility over the last decade as Europe and the rest of the world struggle to cast off the shackles of the 2008/9 economic crisis. Rather bizarrely, it is the lack of significant inflation which has held back average earnings while house prices across Germany have increased dramatically.

The key to long-term average income growth is a mixture of economic prosperity and inflation. If the cost of living increases significantly, as a consequence of higher inflation going forward, this will place pressure on employers to increase wages. So, with inflation being relatively benign for some time, indeed dipping into negative territory in 2015, there has been little or no pressure on employers to significantly increase employee income. Experts believe that inflation will rise in the short to medium term, thereby leading to a rise in average income?

There are few situations where such a volatile economic and political scenario is overshadowed by a relatively strong property market. This is the situation we have in Germany, expectations of a further increase in property prices in the short to medium term amidst real concerns about a significant shortfall in newbuilds numbers.

German property market

As we await figures for the German housing market in 2019, official data from the German government shows that German construction companies invested a staggering €4.7 billion in tangible fixed assets in 2018. This was an increase of 17.4% on the previous year and the highest recorded investment for 25 years. Further data gathered across the 16 federal German states shows that real estate investment in 2018 reached €269 billion. There were nearly 1 million property transactions which is an increase of 13% on the previous year.

Interestingly, residential property accounted for the lion’s share of real estate investment in 2018 with a total of €180.5 billion invested over the year. German business institutions believe that the construction sector will see an increase in investment of 3.3% during 2020. This would suggest an increase in new build numbers but will that be enough to satisfy the market?

German residential property

There are many issues to take into account with regards to the German residential property market. It is worth reminding ourselves of the euro area interest rate which currently stands at 0% and is unlikely to change in 2020. When you consider that the rental yield across Germany are circa 3.5% this is significantly greater than the 0% currently available on German government bonds. Therefore, over the last couple of years we have seen a significant increase in investment in residential property by large institutions.

It is therefore no surprise to learn that German property prices have generally increased by around 70% over the last decade with some areas such as Berlin showing significantly greater growth. Indeed, when looking at Berlin we know that an acute shortage of residential property and the growing population has led to excessive demand for rental homes. This has pushed rental yields in Berlin to anywhere between 4.8% and 6% depending upon the type of property.

Rent controls

Rent controls have been a hot topic in the UK with the Labour Party suggesting the introduction of such controls to make rental accommodation more affordable. The authorities in Berlin have gone one step further and announced plans for a five-year across the board rent freeze. While this is expected to save in excess of 300,000 tenants a significant amount of money in the short term, there are long-term issues which do not appear to have been addressed.

It is worth noting that the plans to introduce rent controls in Berlin are being challenged by the national government in court. Many experts believe that the move will be overturned although we await the official verdict. The German Economic Institute in Cologne believes that the introduction of rent controls over a five-year period could see some properties fall in value by around 40%. While this may be music to the ears of those looking to acquire their first home, the long-term consequences could be far-reaching.

Reduced investment in newbuilds

If the rent freeze was introduced, with talk of a rent cap as well, this would obviously concern investors. As a consequence, the trade association of developers in the Berlin and Brandenburg region, the BBU, believes this would lead to a significant fall in investment. A reduction in construction investment of around 25% and investment in real estate by around €5.5 billion would have a monumental impact on the number of newbuilds across Germany.

At this moment in time Germany as a whole requires 350,000 new homes just to keep up with current demand. When you consider that in 2018 just 286,000 homes were built this shows the ongoing annual deficit. A further reduction in the number of new homes in 2020 and beyond would lead to increased demand for existing properties. As a consequence this would push properties further out of the reach of first-time buyers as institutional investors/domestic investors took control of the market.

In what could become a self-fulfilling prophecy, more people would be forced towards the rental market thereby placing upward pressure on future rental yields. While Germany has always had a strong rental market, with an average of around 60% rental and 40% homeownership, the figure in Berlin is even greater at 85%. Over the last 20 years the level of monthly income required to service rental/mortgage payments has increased from 17% up to 25%.

A long-running problem, no short-term solution

If the Berlin authorities are successful in introducing a rent freeze for the next five years this may be beneficial to tenants in the short term but there are huge long-term implications. While there are no short-term solutions to this issue, there have been calls for the German government to increase the minimum wage and also encourage international/tech companies to invest out with major cities such as Berlin. This would reduce pressure on inner city rental properties which are exacerbated by the influx of expat workers connected with international/tech companies.

So, at this moment in time the German property market is still well-positioned for future growth in the short to medium term. The introduction of a rental freeze in Berlin would only store up further problems in the medium to long term. If the national government was successful in overturning this ambition then property prices would continue to rise as demand for rental accommodation followed suit. Whatever the short term outcome of legal proceedings, we know that the Berlin population is growing by 40,000 per annum and rents have doubled over the last 10 years. Whether we might see the same level of rent increases over the next decade is debatable but there are certainly no signs of diminishing demand.

Despite the fact there are relatively strict rental regulations in Germany, many landlords get around this by classifying repairs as “modernisations” which are acceptable reasons for increasing rent. There is also potential to introduce significant rental increases as and when tenancy agreements come to an end. While this is an issue for those living in Germany and in particular cities such as Berlin, it would appear to offer a very interesting opportunity for investors.

German mortgage market

There is no doubt that relatively cheap finance is fuelling the recent and expected future rise in German house prices. Mortgage rates are currently under 1% with the European Central Bank interest rate expected to remain at 0% for at least the next 12 months. The availability of cheap finance has seen many investors looking to acquire German property, pushing prices in some areas to levels higher than those seen before the debt crisis a decade ago. Whether or not this will lead to a property boom and house price bubble remains to be seen as cheap finance is likely to be available for some time to come.

The good news for international investors is that there are no restrictions on foreign investment/ownership of German property. There has been talk that German property prices are overvalued by anywhere between 15% and 20% but demand still continues to grow as supply struggles to keep pace. It is worth noting that German mortgage arrangements would require a minimum 20% deposit which could rise to 40% depending on the borrower’s situation. The type of mortgages available is different to the UK with interest only mortgages not available on the full value of the property. It is also worthwhile checking out the tax situation of your specific scenario as not all borrowers are able to offset their mortgage interest against income.

The costs associated with a property purchase in Germany average around 10% of the property value, with the buyer expected to cover the lion’s share. You will also pay a local transfer tax which can vary from between 3.5% in Bavaria up to 6% in Berlin and even higher in some areas. On the whole, finance is readily available via domestic and international lenders at extremely competitive rates. The majority of mortgage rates are fixed for the first five years although it is possible to negotiate a fixed rate for the full duration of up to 30 years.


It is rather bizarre to see the German property market proving extremely resilient despite the economic challenges facing the country. Brexit, political volatility and a serious shortfall in the number of newbuilds has created a very challenging and in some ways unique scenario. The spectre of cheap finance is likely to cast a shadow over the German property market some time to come. This will encourage international and institutional investors to increase their German property exposure where relatively low rental yields still compare favourably to negligible savings rates.

The suggestion of a five-year price freeze on Berlin rental accommodation, whether successful or not, has caused concern among some property investors and developers. So, rather than fixing a situation which is very tricky indeed, this legal move by the Berlin authorities could see reduced funds for property development and property investment. This in turn would reduce the number of newbuilds and create yet more competition for existing properties. While the market cannot continue to go up in a straight line, pent-up demand is likely to continue for some time to come.