Is there a property bubble?

We answer these and many other questions in our video blog episodes.

Here is the transcript of episode 12 to read:

The question of the property bubble is not so easy to answer. There may be property bubbles in individual locations, but if you have the right locations, i.e., growing cities where the population is increasing, you tend to find that we have a housing shortage. Because in recent years we have had an annual demand in Germany of around 400,000 homes that should have been built.

However, fewer than 300,000 per year were built. That means we have far too few properties. We have an incredible demand for good housing. At first glance, that speaks against a property bubble. Nevertheless, one might think: "Prices have risen, though. Don't we have a bubble in prices then?". That is due to the differences in locations.

Of course, in the top 7 cities – Munich, Frankfurt, Stuttgart, Cologne, Düsseldorf, Hamburg and Berlin – one can sometimes find the formation of a bubble, and one can also read regularly in the Bundesbank's quarterly report that purchase prices are too high there. Therefore, it is a matter of finding locations where not only is the ratio between purchase price and yield right, but also where the outlook for price development is right.

If you buy an investment property now, e.g. for €200,000, €300,000 or €400,000, and if it is a sensible project, over the years, over the course of your life, you will personally pay only about 1/5 of the cost for this rented property yourself. The tenant and the tax office will pay 4/5 for you.

And if we stick with that example and the flat costs €400,000 and you only pay 1/5 of it yourself, that amounts to €80,000 over the course of your life that the property has cost you until it is paid off.

So if you yourself only pay €80,000 for a top property in your own life, you don't need to focus so much on the question of a property bubble. Even if property prices stop rising dynamically, if they stay flat or remain constant for ten years or even drop slightly, what could possibly be so bad about buying a quality property for €400,000 and only paying €80,000 of your own money over the years?

Regardless of whether there is a property bubble or not, that will always be one of the best investments of your life, because you bought an investment property and only paid for 1/5 of it yourself.

Keywords:
property bubble, housing shortage, purchase price and yield, investment property, tenant, tax office, prime property