Is there still room for growth? Is a real estate bubble on the horizon?

No bubble in sight in the real estate market yet!

Over the past six years, prices across Germany have risen by an average of 20 percent, and in the seven largest German cities by as much as 46 percent. Given these rapid price increases, many prospective buyers are wondering if and when the trend might reverse. Real estate professionals, however, offer reassurance, at least in the medium term: the boom is not expected to turn into a bubble.

The development of the German real estate market is not comparable to the boom of the past decade in the USA or Spain. Market observers therefore currently see no danger of a crash: "Massive speculative price inflations, financed by risky loans, do not exist in Germany," explains Peter Czauderna of HypoVereinsbank.

Experts see signs of overheating only in sought-after locations in major cities like Munich, Hamburg, Frankfurt, and Stuttgart, where demand for apartments meets a steadily shrinking supply. Here, achievable returns are already below three percent.

 Market observers therefore recommend investing in smaller and medium-sized cities with a solid economic base. These are secondary cities with positive population growth and good infrastructure, as is often the case with university towns. They offer growth potential with limited risk, more stable price developments, and higher rental yields. Cities near major cities or even the
secondary locations of metropolitan areas—that is, less desirable locations where rents sometimes rise even faster than property prices—are also worthwhile investments.

Neighborhoods with potential

“Buyers should not only examine the quality of the property, but also the potential of the neighborhood,” recommends Stefan Gawarecki, spokesperson for the board of directors of the mortgage broker Dr. Klein. “It is advisable to find out about the demographic and economic development of the region and about the municipal infrastructure plans.”

Michael Schäfer, an independent real estate agent at RE/MAX Immobilien Kontor Saarlouis, advises private buyers taking advantage of historically low interest rates on home loans to keep a close eye on their personal risks: "Favorable interest rates tempt people to take out large loans, which could become a problem when refinancing at significantly higher interest rates." Michael Schäfer therefore recommends a high initial repayment rate: The total interest plus principal repayment should be between 5 and 6 percent.

Anyone looking to use the property as an investment should pay attention to the price-to-rent ratio, advises Heike Nicodemus of Stiftung Warentest. "If it takes more than 20 years for the net rental income to cover the purchase price, there is a risk that a later sale will result in a loss."

What happens next?

“We continue to expect rising rents and, above all, rising purchase prices,” says Rainer Braun, Managing Director of the market research firm Empirca. However, given an increasingly saturated market and rising new construction activity, smaller increases must be expected in the medium term. “The real estate cycle will probably end when mortgage rates rise again,” predicts Max Herbst, owner of FMH Financial Consulting. Then, alternative forms of investment would once again become attractive to consumers. But an increase in the key interest rate is not yet in sight.