Reasons why property prices will continue to rise

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

Here is the transcript of episode 9 to read through:

It is often asked whether property prices are not already far too high and whether we might even have a property bubble. That may be true for some major cities like Munich or Frankfurt, where prices have doubled in recent years.

One reason for this is inflation. We have 10 % inflation in Germany, which also makes building more expensive. According to the Federal Statistical Office, construction prices rose by an average of 16,5 % between August 2021 and 2022. Building is becoming more expensive, which means property prices will rise in the medium term.

Inflation is now being followed by a wage-price spiral. In the second half of 2022, trade unions demanded significantly higher wages. For example, IG Metall successfully negotiated an 8,5 % wage increase in two stages, along with a one-off payment. One can only imagine what is now happening in the construction industry and what IG Bauen will demand in terms of wages. And if labour costs in the construction sector rise alongside material costs, building will become even more expensive and, as a result, property prices will increase further in the medium term.

To combat inflation, the ECB has now started to introduce countermeasures and has therefore raised the base rate. And with rising base rates, financing costs have now also increased. This makes buying and building property significantly more expensive. Accordingly, owner-occupiers are leaving the property market in droves. They will no longer build. They will no longer buy. Roughly 8 out of 10 owner-occupiers have abandoned their plans to move into their own homes.

This means fewer people are acquiring property. And in a country where already over 50 % of the population—that is, more than 40 million people—live in rented accommodation, the pressure and demand for rented flats will increase significantly in the future. After all, the trend is moving away from property ownership towards renting. As many developers are now withdrawing from the property market, there will be an unbelievable shortage of housing.

A tight housing supply is the price booster for tomorrow. This means that fewer homes in the coming years will lead to price increases in the coming years. And the withdrawal of many from the property market means a collapse in construction activity. Many are withdrawing their properties and simply not building at all. The consequence of this is that few new projects will come onto the market in the future, and fewer properties mean significant price increases.

The fact is: we need roughly 400,000 new homes in Germany to prevent the housing shortage from escalating explosively. For years, however, only 300,000 or, most recently, 290,000 homes have been completed annually. If new construction activity now collapses entirely due to rising interest rates and significantly increased construction costs, experts estimate that only 100,000 to 200,000 homes will be completed per year. 400,000 homes are needed, 200,000 homes are completed.

This means an absolute housing shortage in a few years. This dramatic housing shortage is bad news for tenants, but good news for those who then own and rent out properties. Because they will experience sharply rising income.

Now climate change is adding to this. Since climate change is one of the greatest challenges of the coming years or decades, one can understand what it means when no new construction takes place. Hardly any ecological properties are coming onto the market. Already today there are far too few ecological properties that have low heating costs, that have been built in an environmentally friendly way and that have a good footprint when it comes to the climate.

In line with this, the government has now decided to increase tax incentives for ecological new builds by 50 %. This means that compared to the last 30 years, when a property could be written off for tax purposes at 2 % per year over 50 years, you now get 50 % more tax benefits for 33 years. If you buy an ecological new-build property now, it means that it will be more financially viable and prices will rise.

To summarise: 1.5 years ago mortgage interest rates were about 1.5 percent, today they are 4.5 percent. But because interest is tax-deductible when you acquire a rented property and you can borrow the money for half the normal cost, you borrow the money at perhaps just over 2.5 percent interest and pay it back to the bank with money that has been devalued by 10 % through inflation.

That alone makes it a good deal. Conclusion: when interest rates were significantly lower 1.5 years ago, you could acquire a property for about 1/5 of the usual outlay in terms of what you had to pay for the property yourself. Today it might be marginally more expensive, but you can still buy an investment property with rising value for 1/4 of the normal cost of a property.

So if you can buy green properties for just a quarter of the cost, then we don’t need to worry about property bubbles. The bottom line is: 10 % inflation, 50 % higher tax benefits, loan interest rates halved – now is the time for rental eco-friendly properties.

If you want to know more about buy-to-let properties, come along to one of our property seminars. Register for the date of your choice at www.Immobilien-Einkommen.de and see how you can build wealth with passive and property income.

Keywords:
property investment, letting, capital growth, tax savings, inflation hedge, capital investment, property market, location, financing, advisory services