Market Insights: Housing Affordability in Germany
Leading indicators reveal that over the past two decades, renting a home in Germany has been a more attractive and affordable option than owning one
Background
One of the many aftereffects of the Pandemic has been the dislocation experienced by global real estate markets. In the residential sector, this has taken the form of a positive demand shock, leading to a widespread and rapid appreciation of property prices. The extent of this increase was highlighted in research published by Knight Frank, which found that in the year to June 2022, house prices were rising at an average nominal rate of 10% per annum across the 56 world markets and territories it tracks.1
Europe’s largest economy experienced a similar performance. Between 2010 and 2021, the price index for owner-occupied homes in Germany rose by a cumulative 84%.2 However, almost a quarter of this aggregate increase has occurred in the three years since 2019. This recent growth can be attributed to pent-up demand, low (negative) real interest rates, and strong household balance sheets.
German Residential Performance Indices
Index: 2010=100, (2003 – 2021).
Source: QSix analysis; Verband deutscher Pfandbriefbanken (VDP); German Federal Statistics Office.
Recent Performance
In the short period following the Pandemic, German house price inflation has climbed at a record pace, outperforming increases in residential rents by 16% and household incomes by 13%.
German House Prices Relative to Household Income and Rent,
Fair Value = 100, (Q3 2020 – Q1 2022).
Source: QSix analysis; OECD.
This price appreciation has consequences for prospective homebuyers. Since 2010, house prices have risen over three times as fast as wages (27%) and almost five times as fast as general consumer price inflation (17%). To some extent, ultra-low mortgage interest rates have acted as a counterbalance to this fundamental divergence. Even so, realised housing demand has been partially suppressed, demonstrated by a 3.7 percentage point decline in the share of homeownership and a corresponding 3.7 percentage point increase in the share of the population privately renting their home.
Housing Costs
German households are spending a greater share of their disposable income on housing. In 2021, the average household (owner-occupied and tenanted) spent 23.3% of net disposable income on housing, 8.4% more than in 2020 (21.5%). Homes occupied by a single person spent a disproportionately higher share (31.8%), while an average couple with no children spent much less (20.1%). Wage growth has supported a decline in the population burdened with high housing costs (>40% of income), from 13.9% in 2019 to 10.7% in 2021.
Affordability is Deteriorating
The house price-to-earnings multiple provides a high-level snapshot of relative affordability. A recent analysis comparing the annual earnings multiple required to purchase a new 70-square metre apartment shows that in 2022, an average German homebuyer in full-time employment would need 6.5 times their yearly salary to fund a home purchase. In 2021, the multiple was 6.0 times earnings. This increase implies an 8% reduction in affordability in the space of a single year.3
The ability of buyers to accumulate deposit savings at a fast enough rate has long been a factor delaying homeownership. Rising house prices mean that homebuyers who require mortgage finance must provide a higher equity component to finance a purchase. However, as house prices increase faster than incomes, saving for a deposit takes even longer.
While this divergence between house prices and income is one factor dampening realised demand, the current rise in borrowing costs is also significant. Rising interest rates further suppress affordability by increasing the long-term cost of a mortgage loan.
In our opinion, these factors will place further affordability pressure on homebuyers and lead to a slower rate of growth in homeownership. The consequent redistribution of demand is then increasingly likely to fall onto the private rented sector.
Multiples of Annual Income to House Prices, 2022
Average Multiple of Earnings to Purchase a 70 Square Metre Apartment in Large Cities
Source: QSix analysis; Deloitte.
Leading Indicators: Long Run Indices
An analysis of leading house price affordability indicators shows that over the past two decades, renting a home in Germany has been a considerably more attractive and affordable option than owning one.
House Price to Earnings The house-price-to-earnings ratio is a leading indicator of affordability. A numerical index of 100 indicates that house prices and incomes are both moving in parallel, while a higher value means house prices are growing faster than incomes. A sustained period of increase in this metric is indicative of widening disparity and falling affordability.
On an international comparison basis, long-run analysis reveals that relative to incomes, German house prices are still amongst the most affordable in Europe and remain significantly below the levels of other mainstream markets such as the Netherlands and Sweden.
Comparable data indicates that in 2021 house prices in Germany diverged by 11% relative to incomes. However, prices were still below the European market average rate of 20%. By comparison, the Dutch and Swedish housing markets have experienced more pronounced price appreciation and have increased by 43% and 51% ahead of average incomes.
Following a historical period of relative underperformance, unlike many of its European counterparts, the German housing market didn’t require a significant price correction following the 2007-2008 financial crisis. A value recovery that commenced around 2011 has continued unabated over the past ten years, sustained by strong economic and demographic fundamentals.
House Price to Income Index, 2000 – 2021
Fair Value = 100
Source: QSix analysis; OECD.
House Prices Relative to Rents A second leading indicator of affordability is the house price-to-rent ratio. This indicator, expressed as a multiple, examines the average purchase price for a home relative to the annual rent level. The inverse of this ratio indicates the level of return (yield) that an investor might expect to receive.
Recent data released by the Deutsche Bundesbank found that in 2021, national house prices were an average of 30.1 times annual rents. In 2010, that multiple was 20.4 times, implying a 48% expansion. The data also reveals that affordability pressures have deepened disproportionately in Germany’s seven core cities. The average multiple for these cities was 35.1 times in 2021, compared to 22.0 times in 2010 – a 60% increase.
House Price to Rent Ratio, 2004 – 2021
Factor Multiple (x) of Purchase Price to Annual Rents for Apartments in Germany.
Source: QSix analysis; Deutsche Bundesbank.
Time series data shows that relative to rents, house prices in Germany have spent almost two decades catching up with the European average, with the index only finally converging in 2021. Furthermore, based on this ratio, the index indicates that house prices in Germany remain well below other large comparable rental markets.
House Price to Rent Index, 2000 – 2021
Fair Value = 100
Source: QSix analysis; OECD.
Rental Cost Comparison
Looking across developed Western European countries, Germany stands out as one of the most affordable places to rent a home.
For a new tenancy, the average market rent for a desirable 80 square metre apartment in one of the four prime cities is between €1,150 and €1,500 per month – in line with the broader European average rent of €1,300 per month. By comparison, it would cost around €2,300 per month to live in Paris, €2,000 in London, and €1,800 in Amsterdam.
As in-tenancy rent increases tend to lag behind market rent inflation, existing tenants in Germany tend to pay much less. Our experience in Berlin shows that new residential leases are currently achieving a 34% premium compared to average passing rents for existing tenancies. This reversionary premium (the difference between existing and market rents) is likely greater in large cities defined by above-average populations and higher housing densities.
With property prices outpacing rental growth over the past decade, renting has remained a cheaper option than homeownership. To illustrate, it would cost around €440,0004 to purchase an 80-square-metre apartment in central Berlin. Based on recent lending statistics, this would require an equity deposit of 19% (€84k) in addition to transaction costs related to the purchase, equivalent to around 11% (€48k). The purchase price balance would be funded by a €356,000 mortgage on a 15-year basis, amortising at 2% per annum. This mortgage would cost approximately €1,700 per month in loan interest and repayments, with a remaining balance of €213,000 at maturity. 5
This cost comparison implies that for a recent homebuyer, before considering the upfront equity commitment or outstanding mortgage balance on maturity, the monthly cost of home ownership in Berlin could be 48% more expensive than leasing an apartment in the open market. The gap could be more expansive in cities with higher house prices, lower average market rent, or for existing tenants who benefit from mature tenancies.
European Residential Rents
€ per Square Metre in a Selection of European Markets, 2022.
Source: QSix analysis; Deloitte.
QSix in Germany
QSix has been managing portfolios and advising investment funds in the German residential market since 2006. We have a seasoned investment team with an outstanding track record and understanding of the market and operating environment.
Phoenix Spree Deutschland, our flagship German Residential Fund, achieved a 197% total shareholder return since listing on the London Stock Exchange in 2015. 6
We have investment professionals based in London, Berlin, and Amsterdam. We would be delighted to discuss how we might work together with you.
ENDNOTES
1. Knight Frank Research, Global House Price Index (Q2 2022), September 2022.
2. German Federal Statistics Office, House Price Indices, September 2022.
3. Deloitte European Housing Market Research, 2021 and 2022.
4. Guthmann, Median Apartment Price of €5,500 per square meter in Berlin, Q3 2022.
5. Dr Klein, Mortgage Finance Calculator, October 2022.
6. Phoenix Spree Deutschland, Financial Statements 2015 – 2021.
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