Bavaria and the real estate bubble

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I've been watching the real estate market here around Rosenheim the last three years, entertaining the idea of buying a home. With ultra low interest rates and fear of inflation and currency reform, many people want to transfer their savings into Betongold. As a result, an ordinary single family home in our village of 6000 people costs half a million euros, whether old our built new. The housing prices have been rising at 5-10% per year.

 

I wonder how long the real estate market can keep this high? I feel that if interest rates can no longer be artificially suppressed that enough people will have to default, vacating possibly enough homes to bring the local market back somewhat to realistic rates.

 

Would anyone with more experience in this arena like to weigh in? Should I force buying a house now, or cross my fingers for a more favorable buyers market in the distant future?

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There has been talk for ages that Munich and Bavaria are over priced, and that there will soon be fall in property and rental prices. I have heard that since I settled here in 1996. I wouldn't wait if you want to/can buy. My house has nearly doubled in value in the last five years alone (granted we renovated a bit) but it will never drop any where near to the price we paid. Indeed, I suspect it will only gain value.

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"I feel that if interest rates can no longer be artificially suppressed that enough people will have to default"

 

Driving to work this morning (on the radio advertising) the Sparda Bank (/www.sparda-bw.de) is offering just over 1% fixed for 10 years so what do you mean by the above statement - you may have to wait a long time before they default.

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Yes, add that to the mix. We just refinanced our loans to under 2% (from over 4%). :D

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As a new owner of an apartment in Munich, I hereby declare the bubble shall continue, at least until we decide to sell.

 

That said, I think the current worry is deflation (Schauble and his schwarze null). Also, German banks are so conservative (you have to have a large percentage of the purchase price, 20% min or so) that a crisis based on people not paying is less likely here than say in the USA where mortgages were handed out with zero down (and variable interest rates).

 

So if a house or apartment is to your liking and you can make the payments (and the bank will generally check this thoroughly) there is no reason not to buy. A bad idea is assuming that the price will increase at the current rate (although we all secretly hope so) and that your investement will double in price in X years. This might make one pay too much for the object.

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I'm hoping the bubble doesn't burst as that's my pension! :ph34r:

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That said, I think the current worry is deflation (Schauble and his schwarze null). Also, German banks are so conservative (you have to have a large percentage of the purchase price, 20% min or so) that a crisis based on people not paying is less likely here than say in the USA where mortgages were handed out with zero down (and variable interest rates).

 

...and most people rent, there is no pressure to buy. That's why those who do buy usually are in a good financial shape.

Jobs are moving from Nuremberg area to Munich area, so property prices will keep increasing up to say London level.

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In Mercer's lastest survey of world cities with the best life-quality Munich came in 4th place. The OP is in Rosenheim, an hour away from Munich with public transport. Any commutable distance to Munich (esp. with public transport) will not see a drop in prices for the foreseeable future. Plus south of Munich places you a short drive from Austria and Italy. And more than likely you have a lake nearby.
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If you read a lot of previous threads on TT you will see lots of advice stating that housing prices in Bavaria remain static in real terms, that it makes more sense to rent than buy, that buying is not a sound investment. Perhaps because I always bought wherever I worked or lived, and I never looked at any property purchase as an investment and I had made enough money from previous property purchase, it made sense to me anyway, to buy. Although, it was a gut decision more than a calculated one, it has so far turned out to have been the right one. In fact I wish I had bought a few more houses as purely investment :P

 

Eight years later I am not really sure what I would do in the current situation although a few friends have asked me. I see prices of over 500K for a new 90m2 apartment in Munich and even with low interest rates that is a lot of dosh. I highly doubt that I earn enough for a bank to give me a 400K mortgage, and the way mortgages are structured in Germany seems very odd to me because it appears that you tend to be paying interest and very little off the principal itself, which kind of defeats the purpose of buying in the first place... I told you I was no financial expert!

 

So my advice to date has been that if you are buying to live in the place, you intend to live there for the foreseeable future, and you can comfortably afford the mortgage and put some extra aside to pay off the principle then it is a reasonable thing to do.

 

Will the current high prices be sustained or as the OP says will the bubble burst? Nobody has a crystal ball that can tell you the future with any certainty. You have to make a decision and live with it, no matter what may occur in the future.

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the way mortgages are structured in Germany seems very odd to me because it appears that you tend to be paying interest and very little off the principal itself, which kind of defeats the purpose of buying in the first place...

 

Where did you get that from? Of course, you can choose to pay off more of the principle than the standard 1 or 2% p.a.

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At the end of the day it doesn't really matter whether property prices drop in the future. If you buy the right property then that is your home, and how much it is theoretically worth is basically irrelevant. And if you've bought to rent then it's rental rates and demand that you need to worry about, not the value of the property.

 

In London, house prices doubled in the space of six years, and when the "crash" came they fell back about 20% before picking up again. So anyone waiting for a crash here is likely to be disappointed by how little the prices will fall and how much they will have risen before then. Moral of the story: if you want to buy, buy now. But remember that renting is cheaper.

 

post-977-14255470551315.jpg

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We are paying 2% Tilgung now. They are reluctant offer that, but press them.

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It's not just Munich and Bavaria. The rent in Stuttgart is very close to Munich prices.

 

Will the bubble burst? Let me put it like this, when I looked for my most recent apartment in Munich, I only found one available that was in my price range and suited my needs.

 

When I found my current apartment in Stuttgart, which was actually a bit more expensive than my company approved budget, there were several people looking at it, and the owners got to pick and choose (I've often wondered why they chose me).

 

It comes down to supply and demand, and even at these prices, demand is much higher than the supply.

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Where did you get that from? Of course, you can choose to pay off more of the principle than the standard 1 or 2% p.a.

 

I don't have a German mortgage so I am probably not best positioned to comment however I know they are not like a UK mortgage where the debt and the principle is paid off in a term of 15, 20 or 25 years. I am aware that you can choose to pay off more but how many people are actually disciplined enough to do that if it is not structured that way in the first place?

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But remember that renting is cheaper.

A rather short and sweeping statement there - backed up with zero facts?

 

Considering you can now buy and pay less than 2% interest, and yet renting will often cost around 3% or more (of a property value) I am not sure where you get that statement. N.B. Anything you pay above the 2% interest is knocking off the capital sum of course (like a savings plan kinda).

 

Furthermore if you own the property then after 20 or 25 years and the mortgage has been paid off you have a property worth €xx that has appreciated in value by €xx?

 

Renting is 100% the route if you intend to stay 5 years or less, but if you have any kinda longterm view then crazy not to purchase.

 

p.s. Hanging around waiting for a "housing crash" is rather optimistic. Ain't gonna happen. The market is too basically solid here...there just isn't anything that can rock the boat that badly. A huge rise in interest rates will bring rises to a halt, but then like everyone you won't be able to afford to buy!!

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But remember that renting is cheaper.

post-977-14255470551315.jpg

 

If you had bought ten years ago in Munich instead of renting I cannot really see how that is true.

 

Edit: As JE says

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The rent/buy discussion has been beaten to death in other threads, but in brief it works on the principle that a monthly rental payment is significantly lower than the monthly mortgage repayment on the same property, leaving you with cash in hand to invest elsewhere.

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In that case I would love to know of an investment that will make me 500K over the next 8 years.

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@STB

I think that used to be true when interest rates were around 5% but if you can currently borrow 300k @1% then that's only 3k a year. Peanuts.

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Interesting topic ...as we agreed with the posters above and started to seriously think about buying now while we can.

 

However, our former landlord who has massive rental property in Stuttgart told us to wait 10 years when the old people like himself start to die. There will be a glut on the market and prices will drop. His theory is that the next generation doesn't want the hassle of property ownership and/or inheriting their parents homes and people move around more now.

 

We are still debating now even more due to this theory.

 

This is a very good thread looking for more thoughts from TTer's.

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