Property bubble in Germany: Where is the greatest danger?
Rising property prices are causing uncertainty in many regions of Germany. Experts warn of a possible Property bubble, which arises above all where purchase prices rise faster than rents. Surprisingly, experts see the greatest danger not in metropolises, but in medium-sized cities and rural regions.
What is a property bubble?
A property bubble occurs when purchase prices for properties become detached from achievable rents and incomes. This leads to an overvaluation of property. If the bubble bursts, prices can fall dramatically, with serious economic consequences.
Endangered regions: Unexpected hotspots
An analysis by the consulting firm Empirica shows: The risk of a property bubble is „critical“ in certain regions, especially in rural areas and smaller towns. These include:
- Bavarian districts: Unterallgäu, Schwandorf, Mühldorf am Inn
- Lower Saxony: Stade, Duchy of Lauenburg near Hamburg
- East Germany: Weimarer Land, Hohenlohe district
- Berlin hinterland: District of Teltow-Fläming
In the largest German cities such as Berlin, Munich and Hamburg although the risk is categorised as „rather high“, it remains lower than in the critical regions.
Indicators of a property bubble
Experts analyse various indicators to assess the risk of a bubble:
- Completion rate: How many flats are being built per 1,000 inhabitants?
- Purchase price-rent ratio: How often does the annual rent have to be paid to cover the purchase price? (Currently around 33 times in large cities)
- Financial viability: How well can a condominium be financed with regional income?
The recommended guideline value is 25 times the annual rent. Values above this are considered expensive.
What happens when the bubble bursts?
If households take on too much debt to finance property purchases, the risk of a bubble increases. According to Empirica, a possible fall in prices could have the following effects:
- Property prices in the seven largest cities could rise by up to 37 per cent fall.
- Even in shrinking regions, price declines of around 8 per cent possible.
Such developments could have a similar impact on the economy as the global financial crisis in 2008.
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Legal notice: This article does not constitute tax or legal advice. For individual questions, please consult a lawyer or tax advisor.
