Germany Property Market Overview

Lauded as one of the most undervalued property markets in Europe, the German property market has attracted all sizes of investors from individual investors to funds with billions of Euros to spend.

However, there are very good reasons why the German property market is at a low ebb.

The economy, since the mid-nineties, has seen year on year declines. During the same period, since the property bubble burst back in 1995, property prices have also declined year on year.

Recently both the German economy and the property market have stabilised and many have seen this as the bottom of the market and a great time to invest.

It may well be true that the market is probably as low as it will go, but this does not mean it will increase much either, and there is no sign it will increase much in the near term either.

There remain very good reasons why we can’t fully recommend investing in the German property market.

Mortgage finance in Germany is not very good or flexible. It is common that foreigners may only obtain 50% LTV, a state that has gotten even worse given the worldwide credit crunch.

Transaction costs are very high, often around 12-13% of the purchase price is spent on taxes and fees. This makes the German property market very illiquid, and with no sign of growth it will take a long time before you can even get your costs back on the investment.

Still today rental yields aren’t as high as they were 5 years ago (now around 4%). As a landlord one must comply with the strict legal regulations not to mention the onerous tax laws.

Cities in the east of Germany, such as Berlin, Leipzig and Dresden, have seen, and continue to see, huge sums of money spent being spent on them. Whilst this money has in the main had a positive effect unemployment remains high and the economic outlook uncertain.

Western cities, such as Munich, Frankfurt and Hamburg are the traditional economic powerhouses of the German economy. If, one day, growth starts to take off it may be these locations that benefit first.

Now in 2009 Germany is again caught in a recession – the prospects for the German housing market look bleak, thus we’d recommend avoiding it completely.

Without significant improvements in Germany’s economic situation and reform of the mortgage market, there lacks much stimulus and confidence in the property market. On top of this the high costs and regulation make it hard to see why one would invest in property in Germany.