Mr. Voigtländer, is now a good time to buy a property?
Michael Voigtländer: That's not so easy to answer. If you look back, you could say: It would have been much cheaper to buy a property in 2021 when interest rates were even lower. But looking to the future, one has to say: the prospects for the real estate market are good, both for investors and for owner-occupiers. We must assume that there will continue to be a great shortage of real estate, especially in metropolitan areas. This promises further increases in value or at least continued value. And in that respect, I wouldn't say now per se that this is a bad time.
In which properties and locations is it more worthwhile to buy than to rent?
Energy efficiency has become an important purchase criterion for properties. Every buyer has to deal with this and ensure that the energy consumption of the apartment or house is as low as possible and that at some point they can rely on renewable energies, for example through a heat pump. As far as locations are concerned – metropolitan areas will continue to grow. We actually have positive growth prospects in all metropolises, be it Munich, Berlin, Hamburg, Frankfurt or Cologne. This means that the population will grow and the surrounding communities will also grow. This is an important criterion for future demand.
Michael Voigtländer is a real estate economist at the German Economic Institute (IW) in Cologne and professor of economics at the Bonn-Rhein-Sieg University of Applied Sciences.
However, prices are already high in large cities; in downtown Frankfurt the price per square meter is 8,000 euros.
Well, the longer you keep the property, the more it is worth buying, despite the high prices. But if I'm only in Frankfurt temporarily for three to four years, I should think about it carefully. Then in the current phase I would say that renting can be more worthwhile. You have relatively high transaction costs when buying. If I move out again in a relatively short period of time, I may not get those transaction costs back despite the increase in value. The interest rate level is not attractive enough for this.
This means that buying is still only worthwhile for average earners in the city if they use the property themselves.
Yes, if I have a time horizon of 15 years, then I can assume that the increases in value will be very strong. I expect interest rates to fall again in the future. This makes follow-up financing cheaper. At the moment they are so high because of inflation.
Will housing prices rise again soon?
Rather yes. There are two important factors for the price of real estate: one is the development of rents and the other is the development of interest rates. Rents are currently rising very sharply. This factor is currently contributing to price stability because, on the other hand, interest rates have risen very sharply. The faster and the more rents rise, the more likely further price increases are to be expected. The market expects interest rates to fall sooner or later. Because inflation is so persistent, this will take some time. But I think we will see significantly lower interest rates again in the second half of this decade. And of course that has a positive effect on real estate prices.
How has the real estate market reacted to the ECB's interest rate decisions so far?
People keep saying that prices have risen so much. But if you compare this with the development of interest rates, you have to realize that prices could actually have risen even more due to the development of interest rates. The market was a bit more reserved then. We even had some room for improvement in prices. As interest rates rose, many expected prices to fall. But that actually offset the catch-up effect. That means prices haven't risen any more, but they haven't fallen much either. In this respect we have an almost balanced market at the moment. We always look at: What does it actually cost to buy and what does it cost to rent? And we're about even there.
How much would interest rates have to fall for people to be able to afford property?
We did a study on affordability. It shows that within a short period of time, the burden of purchasing a 130 square meter apartment for a family has increased from around 30 percent of their income that they have to spend on the purchase to 40 percent. I think interest rates would have to fall by at least one percentage point so that the burden when purchasing is noticeably cheaper.
Rents continue to rise. When will this stop?
I can't be very encouraging. We are only now entering the phase where it is clear that there is clearly not enough construction going on. Large cities in particular continue to grow strongly, but so do smaller communities. On the other hand, construction activity is currently falling significantly. The pressure on the rental housing markets continues to increase. We are seeing less significant increases in some southern German cities such as Stuttgart and Munich because the markets there are already exhausted. But we are seeing strong increases, especially in the surrounding communities. I cannot imagine that the pressure on the rental housing market will really ease over the next few years. This would require more housing construction.
If you can and want to buy – what is the smartest way to finance the property?
Anyone who makes the leap into ownership now has an advantage. Since we have high inflation, incomes tend to rise somewhat faster. This means that the high rates that I pay now will be virtually devalued by inflation if I have corresponding wage increases. This is definitely an advantage that needs to be taken into account. And the other thing is: I expect interest rates to fall, so it's worth considering saying that I'm not committing myself to financing for ten to 15 years, but rather taking out a loan for part of the sum for just five years. The interest rates can be significantly lower again. But of course it comes with a certain risk. I think the chances of falling interest rates are relatively good. If you accept this risk, it can be well worth it.
This article first appeared on capital.de.