Reasons why real estate prices will continue to rise
In today's edition of our video blog, you'll learn a lot about why real estate prices will continue to rise.
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We answer these and many other questions in our video blog editions.
Here is the transcript of episode 9 to read:
People often ask whether real estate prices are not already far too expensive and whether we might even have a real estate 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 % of inflation in Germany, which means that construction is also becoming more expensive. According to the Federal Statistical Office, prices in construction increased by an average of 16.5 % from August 2021 to 2022. Building will become more expensive and thus the prices for real estate will rise in the medium term.
Inflation is now being followed by spiraling wages. The unions demanded significantly higher wages in the second half of 2022. For example, IG Metall pushed through 8.5 % wage increases and a one-off payment in two parts. One can imagine what will now happen in the construction industry and what IG Bauen will now demand in terms of wages. And if, in addition to the cost of materials, labor wages in the construction sector also rise, construction will become even more expensive and thus real estate will also become even more expensive in the medium term.
With inflation, the ECB has now started to introduce countermeasures and has therefore raised the key interest rate. And with rising key interest rates, financing rates have now also risen. This makes buying and building real estate significantly more expensive. Accordingly, owner-occupiers are saying goodbye to the real estate market en masse. They will no longer build. They will no longer buy. Around 8 out of 10 owner-occupiers have abandoned their plans to move into their own four walls.
That means fewer people are buying property. And in a country where today more than 50 % of the population, i.e. more than 40 million people, already live in rental housing, the pressure and demand for rental housing will increase significantly in the future. This is because the trend is moving away from owning to renting. With many developers now withdrawing from the real estate market, there will be an incredible shortage of housing supply.
A shortage of housing supply is the price turbo for tomorrow. That means fewer apartments in the next few years will lead to price increases in the years to come. And the withdrawal of many from the real estate market means slumping construction activity. Many are pulling back on their properties and simply not building at all. As a result, few new projects will come on the market in the future, and fewer properties mean significant price increases.
The fact is: we need around 400,000 new apartments in Germany to prevent the housing shortage from escalating. For years, however, only 300,000 or most recently 290,000 apartments have been completed each year. If new construction activity now collapses completely due to the rise in interest rates and the significant increase in construction costs, experts predict that only 100,000 to 200,000 apartments will be completed each year. 400,000 apartments are needed, 200,000 apartments are completed.
This means an absolute housing shortage in just a few years. This dramatic housing shortage is bad news for tenants, but good news for those who will then own and rent out properties. Because they will experience sharply rising incomes.
Now climate change is added to the mix. Since climate change is one of the biggest challenges of the next years or decades, you can understand what it means when there is no more new construction. Hardly any ecological real estate will come onto the market. There are already far too few ecological properties that have low heating costs, that were built in an environmentally friendly way and that have a good footprint when it comes to the climate.
Fittingly, the government has now decided to increase the tax incentive by 50 % in ecological new construction. That means compared to the last 30 years, if a property was tax deductible at 2 % per year for 50 years, you now get 50 % more tax benefits for 33 years. If you buy a new construction ecological property now it means that it will be more profitable and the prices will increase.
As a summary, 1.5 years ago the interest on the loan was about 1.5 percent, today it is 4.5 percent. But since the interest is tax deductible, if you buy a rented property and you can borrow the money for half the normal cost, then you borrow the money for maybe a little over 2.5 percent loan interest and pay it back to the bank inflationary with 10 % of devalued money.
For this reason alone, it is a good deal. Conclusion: when interest rates were significantly lower 1.5 years ago, you could buy a property for about 1/5 of the normal cost when it came to what you had to pay yourself for the property. Today it may be minimally more expensive, but you can still buy a capital investment property with increasing value for 1/4 of the normal cost of a property.
So if you can buy ecological real estate for only 1/4 of the cost, then we don't need to think about real estate bubbles. It is true: 10 % inflation, 50 % higher tax benefits, loan interest for half, now is the time for rented ecological real estate.
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Real estate investment, renting, appreciation, tax savings, inflation protection, capital investment, real estate market, location, financing, advice