Low prices, high interest rates – what’s next on the real estate market? Anete Lusina/Pexels
Real estate is considered a safe and stable investment. They also often offer high returns. We speak of an investment if you do not live in the house or condominium yourself. The return then consists of the rental income and the increase in value.
In recent years, real estate prices have repeatedly reached new highs. That changed in 2022. The ECB’s key interest rate increases caused financing costs to rise – and residential property prices fell significantly.
Depending on the initial financial situation – keyword equity – the lower prices could make the purchase of real estate more attractive for some people. Before you buy, however, you should find out more about the location, condition and financing.
Long-term, secure, high returns: this is what the ideal investment looks like for many people. Anyone who has a certain amount of equity is usually well advised to invest in real estate. In addition, real estate prices fell last year – more than they have seen in over 60 years. That reported that Kiel Institute for the World Economy (IfW) Beginning of February.
Real estate is a popular, but also particularly expensive capital investment. That’s why you should inform yourself thoroughly about the location, condition and financing before buying. Ultimately, the purchase price is not the only cost factor.
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Why investing in real estate makes sense
The goal when investing is to achieve the highest and most secure return possible. Anyone who invests their money in real estate usually has good opportunities here. A good rental yield amounts to: Volksbank to four to six percent annually. Values that are difficult for savers to achieve, even given the recent interest rate increases. Added to this is the long-term increase in value: especially in times of housing shortage, real estate is considered a relatively inflation-proof investment.
Anyone who invested in real estate in the early 2000s has enjoyed enormous price increases in recent years. The prices for apartments and for single- and multi-family houses are constantly reaching new highs. This was particularly noticeable in large cities such as Berlin, Munich and Frankfurt. Again “Daily Mirror“ reported that rental prices in the capital have more than doubled in the past 14 years. While the average price per square meter was 5.60 euros in 2009, last year it was 11.90 euros.
The current situation on the real estate market
In 2022, this development suddenly came to a halt. The reason for this: Rising interest rates made financing more difficult for many interested parties. Buyers had previously benefited greatly from the European Central Bank’s (ECB) zero and low interest rate policy when financing. Then the ECB raised interest rates significantly within a few months in response to the high inflation rate.
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As a result, property prices fell significantly last year. So recorded that Federal Statistical Office an average price decline of 10.2 percent in the third quarter of 2023 compared to the previous year. What does this mean for investing in real estate? In many regions, real estate is currently available at significantly lower prices than it was a year ago. This is shown by the Federal Statistical Office’s house price index, which measures the average price development on the residential real estate market.
At the same time, building interest rates have skyrocketed along with the key interest rate. This means that while prices have fallen, loan financing has become significantly more expensive. In addition, many loan providers currently require higher equity. Investment broker Laura Schick recently explained this in Podcast “Finance and Real Estate” the “Frankfurter Allgemeine Sonntagszeitung” (FAZ). Accordingly, many banks would now require between 30 and 40 percent equity capital.
But that could change again this year. In January, inflation was 2.9 percent, the lowest value since June 2021. As, among other things, the “daily News“ reported, there has been speculation on the financial markets for a long time about key interest rate cuts for 2024. According to an evaluation by the comparison portal, the building interest rates are at the beginning of the year Check24 already easy.
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Home ownership or capital investment – how should you proceed?
The developments of the last few years show that when buying real estate, it’s all about the right time. The region and your financial situation – i.e. equity and creditworthiness – also play an important role. With a generally high long-term return, real estate is considered a stable investment. Houses and apartments are considered capital investments if you don’t live in them yourself.
According to Laura Schick, if you want to invest in real estate, you shouldn’t necessarily start with your own home. Instead, she recommends using your first property to build up basic assets. This is also helpful for future investments. In this case, your return comes from the property value and your rental income, which, according to the expert, you should ideally set slightly higher than your monthly loan payment. With a residential property you would save on rent, but you would not benefit financially from the increase in value and renovation.
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Find the right property
According to the platform “Financial tipTwo factors in particular make a property a good investment. On the one hand, it is about the potential performance, which also includes corresponding rental income. On the other hand, buyers should make sure to keep maintenance costs as low as possible. In order to invest as little as possible in renovation measures and renewals, you should take a close look at the year of construction and the state of renovation when purchasing.
“Location, location, location” – it’s not said for nothing when it comes to real estate. Location is considered one of the most important factors in increasing the value of a property. First-time buyers should also take this into account when making their choice. It’s less about the attractive inner-city location, which has already been sold off in many cities. Instead, it is more lucrative to look for cheap locations that are still in high demand. This is often more the case in the suburbs of big cities.
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Anyone looking for offers in Berlin or Munich might think that real estate in major German cities is almost impossible to afford without a top salary. An evaluation by Geomap and Von Poll Immobilien Research, which the “Frankfurter Allgemeine Zeitung(FAZ) was available in November 2023. It shows the major German cities with the cheapest real estate offers.
CityNumber of all offersOffers up to 250,000 eurosDresden485550.8 percentEssen346250.1 percentDuisburg279948.9 percentLeipzig798748.8 percentBochum197448.5 percentBremen651647.4 percentDortmund342439.7 percentHannover478939.5 percentNuremberg614233.8 percentMannheim241833.6 percentProportion of real estate offers for Single- and two-family homes and condominiums up to 250,000 euros in the first to third quarters of 2023.
However, there is another aspect to consider when it comes to the location of your property. Landlords who cannot afford additional staff must regularly visit a rented single-family home or apartment building. Investment broker Schick recommends that the property should not be reachable in more than an hour.
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Renting out real estate: How good is the return?
Whether a property is lucrative as an investment depends primarily on the expected rental income. Ultimately, you use the cold rent to pay off your loan. If there is a miscalculation at this point, things can become financially difficult for you. According to “Finanztip”, when determining the basic rent, you should also note that there will be additional costs for the rental. You can usually pass on the house fee, i.e. all operating costs, to the tenant. However, expenses for property management and maintenance are at least partly yours.
The so-called rental price multiplier provides an indication of the approximate return on a property. This value serves as an indicator as to whether a purchase price is appropriate or overpriced. To calculate the rental price multiplier, divide the purchase price by the annual rent. If the value is above 25, the object is valid according to the Financial service provider Dr. Small as overpriced. But it also depends on the situation: values over 30 are not uncommon, especially in German cities. In the long term, an investment here can also be worthwhile.
Purchase price / annual rentRent multiplier250,000 euros / 12,500 euros20250,000 euros / 10,000 euros25250,000 euros / 8333 euros30Example calculations for a property worth 250,000 euros.
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You will incur these costs when purchasing real estate
Have you found a suitable property to invest? Then it’s time to get financing. However, there is one thing you should not forget when applying for a real estate loan: In addition to the purchase price, there are other costs. Initially, a broker’s commission may be charged for brokering the property. One Evaluation of the broker platform Homeday* According to most cases, a commission rate of 3.57 percent of the purchase price is required.
When purchasing the property, you also have to pay for notary fees, registration in the land register and the property transfer tax. Unlike property tax, property transfer tax is only payable once when purchasing a property. Since the federal states set the tax rate themselves, the proportion varies between 3.5 and 6.5 percent across Germany.
cost pointAmountPurchase price 250,000 euros Broker commission (3.57 percent) 8,925 euros Real estate transfer tax (in Saxony 5.5 percent) 13,750 euros Notary and land registry office (around two percent) 5,000 eurostotal cost277.675 EuroEquity (30 percent) 83,302.50 euros Loan (total costs minus equity) 166,697.50 euros Example calculation for a property in Dresden.
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If you are looking for a cheap property, it is worth taking a look at the offers in the Saxon capital. As the analysis by Geomap and Von Poll Immobilien Research shows, over half of the residential properties in Dresden cost less than 250,000 euros between the first and third quarters of 2023. Assuming a real estate agent finds you a property in this price range, you would incur between 25,000 and 30,000 euros in additional costs. Deducting the equity share – we’re assuming 30 percent here – you would still have to finance around 167,000 euros with a building loan.
*Like Business Insider, Homeday belongs to Axel Springer.