Amid high interest rates, is now a good time to purchase property in Germany?

With rising interest rates making mortgages more expensive, many people are understandably questioning whether a property purchase is now affordable for them. Daniela Koegel from finbird.digital weighs up a number of varied factors to explain how the market still offers ample opportunities for buyers, and that the benefits of long-term property ownership remain compelling. 

For expats contemplating the purchase of a home in Germany, the current market offers a spectrum of opportunities and challenges. While the interest rate turnaround has introduced new dynamics into the mortgage and property markets, the potential for anticyclical investment and the benefits of long-term ownership remain compelling.

Recent economic shifts in the German property market

Owning property in Germany is an attractive investment opportunity among expats, thanks to the country's economic stability and high quality of life. However, the landscape of the German property market has recently undergone significant transformations, particularly since the 2021 interest rate turnaround. 

The most notable changes were the initiated adjustments of interest rates by the European Central Bank (ECB) to combat inflation and foster economic recovery, leading to a notable shift in mortgage rates and property prices. For expats considering making Germany their long term home or investment location, understanding these changes is essential.

The 2021 interest rate turnaround

In the last decade, Germany's property market has been characterised by relatively low interest rates, making mortgages accessible and property investment appealing to a broad spectrum of buyers, including foreigners. The ECB's decision to adjust rates upwards in 2021 was a response to macroeconomic pressures, intended to stabilise the economy. 

This policy shift had a ripple effect, influencing not just the cost of borrowing but also the overall dynamics of the property market. For potential investors, these adjustments meant recalibrating expectations and strategies.

Rising interest rates have made mortgages more expensive, thereby impacting affordability for many. However, this situation also introduces a silver lining: adjustments in property prices and the potential for more negotiable transactions. As borrowing costs increase, some markets initially see a decrease in demand, leading to a softening of prices in certain segments. This scenario has particularly affected areas with previously overheated markets, where price corrections could offer new opportunities for buyers.

Navigating the current housing market in Germany

Since the interest rate turnaround in 2021, the German property market has witnessed nuanced shifts that vary significantly across different regions, underscoring the complexity of investment decisions in this new economic landscape.

Metropolitan cities

Cities such as Berlin, Munich, and Frankfurt have maintained their upward trajectory in property prices, albeit at a tempered pace compared to previous years. The underlying reason for this resilience is the sustained imbalance between supply and demand. 

Despite higher borrowing costs, the demand for housing in these metropolitan areas continues to outstrip the available supply, driven by factors such as urbanisation, migration, and economic opportunities.This ongoing shortage supports property values, making investments in these areas relatively stable and less susceptible to fluctuations from interest rate changes.

Regional variations

Beyond the bustling urban centres, the picture is more varied. In less populated or sought-after regions, the increase in interest rates has had a more pronounced effect on property prices, with some areas experiencing stagnation or even declines in prices. These regions, which do not benefit from the same level of demand as their metropolitan counterparts, present a different set of considerations for investors. 

The potential for lower entry prices may offer attractive opportunities, especially if targeted areas are poised for future growth due to economic development plans, infrastructure projects, or demographic shifts.

Anticyclical investment: A strategy for the current climate

The concept of anticyclical investment - buying when the market is low with the expectation of future growth - holds particular relevance in the current German property market. With the recent shifts and adjustments, there are opportunities for those willing to invest against the prevailing economic winds. This strategy requires a keen understanding of market cycles, the ability to assess long-term potential, and the fortitude to make counterintuitive decisions.

Anticyclical investment strategies - wherein investors aim to purchase assets during economic downturns or periods of market adjustment - can be particularly advantageous in the current German property market context. This approach is underscored by several factors unique to the current economic environment:

Loan repayment dynamics

The structure of German mortgages, typically based on an annuity model, plays a pivotal role in why loans can be repaid faster in a high-interest environment compared to a low-interest rate environment. With an annuity loan, borrowers pay a fixed monthly amount that covers both the interest and the principal. When interest rates are low, a significant portion of each payment goes towards the principal. However, as interest rates rise, the proportion of each payment that goes towards paying off the interest increases, initially slowing down the rate at which the principal is reduced.

Over time, however, as the principal decreases, the interest portion of each payment also decreases, allowing for more of the monthly payment to be applied to the principal. This dynamic can lead to a faster repayment of the loan compared to a low-interest environment where the principal decreases more steadily over time.

At the lower rate, the borrower pays less interest over time, but the principal reduces much less with each instalment. At the higher interest rate, initially, more of each instalment goes towards interest, but as the amortisation matches the interest rate level and thus is higher for each instalment, the loan balance and therefore the duration decreases faster because with each payment a higher contribution is made more towards reducing the principal, accelerating equity build-up.

Modernisation and subsidies

The current market also offers unique opportunities for investments in properties requiring modernisation. The German government, through its dedicated institution KfW bank, provides subsidies for energy-efficient refurbishments, which can significantly enhance the value and appeal of older properties. 

For anticyclical investors, this presents a twofold advantage: the potential to purchase at a lower price point during a market downturn and the opportunity to increase the property's value and efficiency through subsidised improvements.

Preparing for the future: Practical advice and long-term outlook

For expats eyeing the German property market, the journey begins with preparation. Securing mortgage pre-approval, understanding the various mortgage products available, and familiarising oneself with German property laws and regulations are essential first steps. Choosing the right type of mortgage - whether fixed-rate, variable, or a combination - will depend on individual financial circumstances and risk tolerance.

Looking ahead, the German property market remains a landscape of opportunity, despite the challenges presented by economic shifts. Expert predictions suggest a stabilisation of interest rates in the near term, with potential for growth in various regional markets. For long-term investors, the fundamentals of the German economy - coupled with the country's legal and regulatory stability - make it an attractive proposition.

Weighing the decision to buy in Germany

By approaching the market with a well-informed strategy, understanding the legal and financial prerequisites, and being prepared to navigate cultural nuances, expats can make informed decisions that align with their personal and financial goals.

The decision to invest in property is always significant, but for those willing to delve into the German market's current complexities, the rewards can be equally substantial. As we navigate these changing times, the value of thorough research, expert advice, and strategic planning cannot be overstated. For expats looking to call Germany home, now may indeed be a worthwhile moment to consider stepping into the property market.

Considering purchasing a property in Germany? Embark on your journey to homeownership in Germany with confidence and ease with finbird.digital, a company that specialises in simplifying the complex landscape of mortgages, loans, and finance. Start your mortgage request today.