2020-03-20 | The real estate market for buyers in time of uncertainty
THE REAL ESTATE MARKET IN TIME OF UNCERTAINTY
Advice for buyers
Practically all assets except real estate values have fallen massively. The economic consequences are not yet foreseeable. People are losing their jobs, entire industries are repositioning themselves. Globalization is questioned and many things change in everyday life for all of us.
We have never experienced such a crisis. Right now it is important for you as a property seller to keep a cool head and plan the future.
I am sure that we will not plunge into a global depression like 1929. The times are completely different. Governments are strongly networked and intervene intensively in the economic cycle to avert the worst. But the recession will be with us for longer.
If you’re wondering what to do as a property buyer now, here is my advice:
First of all, look at the current property values and compare the development of property prices in recent crises. You will find that real estate in Germany has remained stable in times of crisis. Unfortunately, we had no growth but also no “real” falls in value. So real estate was a much better option than stocks, bonds, precious metals or today bitcoins.
Rents, especially for apartments, were always paid in a stable manner. For homes and residential properties as well. In Germany, if the tenant loses his job, the state pays. At least for a while. Nowhere will you get more security as an investor. So it is less a question of whether real estate is worthwhile now and rather which properties are worthwhile. In any case, please expect the supply of “good properties” to become scarcer and the volatility, ie short-term price fluctuations, to increase significantly.
My recommendations to you as a buyer of a self-use property in the economic crisis: Are you looking for a condominium or a single-family house? Then the prices will not fall but remain stable or even increase. Even in the crisis. The reason? The construction costs and the costs for the land will not fall. Construction costs have risen more than purchase prices in recent years. Take a look at the BKI, i.e. the construction cost index. In Berlin we usually had an increase of over 5% per year. These are only the construction costs, not the costs for the property. Land prices have risen considerably more, usually a whopping 8-10% a year. We will no longer experience such increases, as I communicated in late 2018, 2019 and early 2020. But you should still expect stable prices or increases of between 3-5% per year.
The real estate market for vacant apartments and single-family houses can even be seen as “decoupled” from the overall economic situation. The markets are and will continue to be flooded with cheap money. Where else than into real estate should this money now flow? In times of crisis, people think of themselves first. They want to protect their family, and here in Germany your own apartment or house is by far the most valuable emotional possession. We don’t stint on that. People are more likely to sell expensive cars or go on vacation less.
So long as we have a job that enables the monthly bank payments, property is the first choice. Only when highly qualified people lose their jobs en masse and we face global depression, like in 1929 when we had deflation, only then will there be a loss in value due to the sharp increase in offers. But that is the only scenario I can currently imagine where you, as the owner, could really lose a lot of money. An increase in interest rates is very unlikely, particularly in times of crisis.
But please pay close attention to your financing when buying. The type of financing, i.e. term, repayment and variability, are crucial, especially in times of crisis. Pay attention not only to your monthly bank installments but think about the highest possible repayment, costs for repairs and possible follow-up financing after your loan has expired. What happens if you lose your job? How quickly will you find a new job? What happens in the event of illness, accident, death, etc.? Please discuss these risks with your financial advisor and how you can protect yourself against them. I also recommend reading the Finanztest Foundation and talking to an independent financing advisor in addition to your house bank.
Of course, we as brokers also advise you on market prices and our market forecasts in our locations in Berlin, Brandenburg, Leipzig and Magdeburg. Compare our past forecasts with reality or contact us directly.
In conclusion, don’t wait with your purchase decision if you want to live in the property yourself. On the contrary: As long as your bank finances you, you should secure the financing promptly. It may well be that banks will offer fewer customers financing in the near future. Therefore, you should act now and not stall for time.
My recommendations to you as a buyer of an investment in the economic crisis: More than with owner-occupiers, caution and judgment apply to investors in the economic crisis. Take a close look at the factors for a rented apartment. What exactly is rented, at what rental price? Is it a new apartment or an old apartment? Your customer is the tenant. Will the tenant be able to pay the rent even in times of crisis?
Which tenant group do you address? Not only because of Corona but because of the Berlin politicians there are fewer investors on the Berlin real estate market who want to buy a condominium, so prices in Berlin for rented apartments are under pressure.
We expect falling prices for investments in old buildings in which the rent index applies. Regardless of whether the rental cover will last or not, the message is clear. Over 80% of Berliners are tenants and choose politicians who promise cheap rents. No matter what economic consequences this has or whether landlords are expropriated. However, this explicitly does not apply to new buildings in Berlin and of course not to Brandenburg, Leipzig and Magdeburg. New buildings in Berlin will be completely decoupled from the old ones. In new buildings, this means that rents will continue to rise or remain stable, especially for apartments that can be rented for less than € 1,000 a month. No matter how big these apartments are. So if you want to buy an apartment as an investment and want to have a positive household bill, I recommend apartments in a new building and those that pay less than € 1,000 a month. Payoff means something different for every customer. In any case, the installments for the bank and the monthly additional costs should be paid so that you do not make a loss. In this way you “secure” your capital. And that is a very good scenario in times of crisis.
More on this in a personal appointment.
If you want to buy an old building apartment in Berlin as an investment, you should proceed as follows: Factor 25 on the rent index should be your highest bid. The rent index, even if controversial and questioned by the rent cover, is a realistic basis for your investment decision. Depending on the location and condition of the apartment, you can also calculate less than a factor of 25. Factor 25 is the annual rent x 25. This means that after 25 years the tenant has paid off your apartment. We advise you to buy such apartments. Because in addition to this solid economic basis, you benefit from the added value of these apartments. You can currently and in the future sell a vacant apartment in an old building to owner-occupiers, such as your tenants, at very good prices. Why? There will also be a very high demand for apartments in Berlin in the future. Berlin will become one if not the most important metropolis in Europe. People will want to live and work here. But thanks to Berlin’s local politics and weak administrations, construction will no longer take place and there will be no further condominiums due to the anticipated ban on conversion across Germany, we will see more and more owners and fewer tenants in the coming years. The tenants will try to get out of the rented apartments in condominiums so that they are free and independent and provide for their age by being able to live “rent free” in old age. This trend will intensify considerably. That is exactly why you can also buy old apartments in Berlin at a good price today and rent them solidly in the long term.
If you have any questions, please don’t hesitate to contact us so we can schedule a personal appointment.