Real estate value development: Positive for more than 10 years
Is there still an increase in the value of real estate today? For years we have been reading and hearing about a real estate bubble and that it will soon burst.
The corona virus caused additional uncertainty. Many kept their money together, but at the same time asked themselves how they could avoid the dangers of inflation and thus demonetization. Not so easy when common forms of investment such as savings accounts have negative interest rates.
For many investors, real estate as a capital investment was the saving straw - after all, concrete gold is a safe investment, so the credo goes. In order to give you as an investor a feeling for the price developments of the last few years on the real estate market and to shed light on future potential, we have summarised everything on the subject of real estate appreciation in this article.
We answer the question of whether - and if so, where - there are still opportunities for value appreciation and what investors in real estate should look out for now.
Real estate appreciation in the last 20 years
To get a first impression of the appreciation of real estate, we look at the following statistics of the last 20 years:
Value increase of real estate in the last 20 years (Source: Federal Statistical Office, own calculations and own presentation)
At first glance, it is immediately noticeable that the value of real estate was relatively stable between 2001 and 2010 and that there was no increase in the value of real estate until around the end of 2009. The value of real estate even declined slightly at the beginning and then stagnated.
The values above should first be considered regardless of whether the property is intended as an investment or as a home of one's own. The house price index is shown with a value of 100 for the year 2005. If the blue line is below 100, the value of real estate at the time under consideration was lower than at the reference date 2005. If the blue line is above 100, the value of real estate was higher. The constant dark blue line shows the trend in the period under consideration between 2001 and 2021.
From 2010, when the ECB pumped massive amounts of money into the markets in response to the financial crisis of 2008/2009, momentum comes to the house price index, and it comes massively.
The main message of the graphs: The increased demand for real estate has accordingly led to higher prices.
Real estate appreciation over the last 30 years
Let's extend the observation period a bit further to 30 years. How has the value of real estate increased over the last 30 years?
Value increase of real estate in the last 30 years (Source: Federal Statistical Office, own calculations and own presentation)
Again, the reference value is 100 in 2005. What does the graph say?
Between 1991 and 2005, the curve is relatively flat. Little appreciation in real estate was observed during this period. However, this is not negative news when one considers how real estate functions as an investment.
The biggest advantage is that a rented flat often does not cost the owner a cent in monthly maintenance. On the contrary, the tenant even builds up assets for the owner when the rent is used to repay the property loan.
The owner is therefore not dependent on the increase in value per se, but can regard it as a "nice" side effect. If prices remain stable, he benefits every month due to the repayment, even without an increase in value.
From 2010 onwards, as described above, there will be a lot of momentum in property prices. This speculative gain is of course nice for owners. Low interest rates and the ECB's loose monetary policy led to sharply rising property prices.
Real estate appreciation in the last 10 years
Let's focus on the period that has the highest relevance for us in 2021: The appreciation of real estate in the last 10 years:
Value increase of real estate in the last 10 years (Source: Federal Statistical Office, own calculations and own presentation)
The black trend line clearly shows how strongly property prices have increased over the last 10 years.
Many investors are therefore reacting insecurely and are afraid of future negativeperformance. But is this fear well-founded?
To answer this question, we need to take a look at the reasons for the high increase in property values over the last 10 years:
ECB crisis mode: First the financial crisis of 2008/2009, then Corona in 2020. These were the two occasions that forced the ECB and central banks worldwide to stimulate the economy, save (private) livelihoods and support state budgets.
Low interest rates: If you look at the development of interest rates over the last 100 years, they have fallen constantly. Decade after decade, interest rates fell, and today the key interest rate is at 0%.
Immigration: In the last 10 years, many people immigrated to Germany, both war refugees and economic refugees.
Are the above-mentioned trends over and is negative performance therefore to be expected? Probably not, because:
Low interest rates cannot be raised overnight. This would lead to numerous state and corporate bankruptcies. The long-term interest rate trend speaks volumes.
ECB monetary policy is unlikely to change as climate change, refugee flows and possible other "Black Swan" events require further financial support for sovereigns, businesses and households.
Lastly, immigration: Rising temperatures and sea levels will ensure that some regions of the world will become uninhabitable or simply not productive enough in the future. We should be prepared for further immigration, which could further boost the demand for housing in safe Germany.
Real estate is and remains a promising investment. This means that real estate remains a promising investment.
Value appreciation real estate table
The increase in property values over the last 10, 20 and 30 years is very interesting. Munich is one of the most extreme examples of real estate appreciation in Germany. The following real estate appreciation table shows how real estate prices in Munich, Bavaria and Germany have developed since 2017.
Development of property prices 30sqm flats
For the table we evaluated more than 100,000 property prices. Let's start with the increase in value of flats with 30sqm:
Munich 30 sqm
Bavaria 30 sqm
Development of property prices 60sqm flats
Similar increases in value can be observed for flats with a size of 60sqm:
Development of property prices 100sqm flats
Flats with a size of 100sqm have shown the following performance since 2017:
This is definitely an extraordinary development. The increase in property values in Munich can probably not be continued in this way for the next 10 years. However, although prices have risen quite sharply in recent years, there is still potential for investors in real estate as an investment in Munich.
Now more than ever, anyone thinking about buying a property as an investment must choose cities that have very good development potential. Of course, no one can predict exactly which cities will develop and how. But there are various key figures and information that help in the selection. It is thus quite possible to minimise risks and concentrate onregions and locations that fulfil all the prerequisites for future increases in value.
Conversely, no one wants to invest in a city where prices will stagnate or even fall in the next few years.
Calculate real estate appreciation
You already own a property and are thinking about selling? Or would you like to know the sales value of your property out of curiosity?
Of course, it is possible to calculate the appreciation of real estate. However, the exact determination of a possible sales price depends on many different factors.
Location is a crucial point, as the example of Munich shows. If the property is located in the countryside or in an area where the demand for housing is not particularly high, this has an effect on the increase in value and thus the sales price. In addition, the condition, year of construction, living space and plot area and other factors playa role in determining an exact market price. Because of this high complexity, an expert is usually commissioned. This expert takes all important factors into account and determines a current market value.
One possibility for a first impression is our property valuation(contact us now). After entering some data about the property, you will receive an estimate of the value.
How can I increase the value of a property?
Passive form of real estate appreciation
Influence on a future increase in value can be exerted BEFORE the purchase. For this purpose, the development of the infrastructure in the surrounding area should be considered:
Is a shopping centre to be built nearby? Are schools or kindergartens being built? Is a company planning to erect office buildings? Is there to be a direct link to the motorway? Will an underground station be built?
Those who plan for the long term canexpecta greater increase in value in the future.
Active form of value enhancement
An existing property can be actively increased in value. The aim is to enhance the value of the dwelling.
For example, through the so-called Fix & Flip. A property in need of renovation is bought, renovated to a high standard and later sold on at a higher price. A few examples of renovations that can increase the value:
Improving energy efficiency
Equipment that creates added value (high-quality fitted kitchen and attractive bathroom)
High-quality looking but inexpensive to implement soils
It is always important that the furnishings are of high quality and look good, but are not expensive to buy. Real wood parquet flooring makes no sense from an investor's point of view, because it is extremely expensive to buy and install.
A vinyl floor looks extremely good, but is comparatively incredibly cheap.
Converting a larger flat into two smaller ones can also increase the value. For example, the price per square metre in Munich for a 30 m² flat is currently €8,450, for 60 m² €8,235. With the conversion into two flats, this would mean an increase in value per square metre of 3.6%.
What happens in the event of an increase in value?
As long as you do not plan to sell the flat, nothing happens for the time being. If you sell before the statutory deadline of ten years, tax will be charged on the profit. If you sell after this period, the profit is completely tax-free. This is a great advantage of real estate in contrast to other forms of investment such as shares.
Tax is also due if the property is bequeathed to you. It is worth considering making a gift during your lifetime.
The increase in value also plays a role in a divorce. In this case, there is an equalisation of gains. The increase in value of the property since the beginning of the marriage is divided in half. Of course, this only applies if there is no marriage contract or other agreement.
When a certain type of investment rises too much in value, it is called a bubble. Perhaps you have heard of the tulip mania? Today, this is called the first ever investment bubble. At the end of this bubble (in 1637), tulip bulbs were sold for the equivalent of 87,000 euros today. That is an incredible sum for a flower.
According to our assessment, there is currently no acute danger of a real estate bubble. The ECB is printing a lot of money. These money supplies have increased further as a result of the Corona crisis. This means that inflation could be imminent in the next few years.
People are therefore looking for investment opportunities - no matter whether they are small pockets or wealthy investors asking themselves: What is the best way to invest a million euros?? Sensible investments should protect the money and in the best case increase in value. This can also be well observed on the stock markets, which have risen sharply. People are emptying their daily and fixed deposit accounts and are looking for the few available investment opportunities to achieve some return. Real estate is a relatively safe option in this respect.
We do not believe that there will be a real estate bubble or that it will burst in 2021. Of course, there is a risk of price declines in some overheated locations.
However, due to the good selection of properties in suitable locations, this usually does not happen to our clients. We also pay attention to sustainability in terms of price and economic development. For this purpose, we have the most modern tools at our disposal for selecting investment properties.
How does the value of a property increase?
There are many reasons for the rise in property prices. Interest rates, demographic trends, the relationship between demand and supply, and many more.
But what is most striking is the correlation between ballooning central banks around the world and international property prices. Let's take a look at the balance sheets of the major central banks. They have literally exploded since the financial crisis of 2008:
Since 2008, the balance sheets of the major central banks have continued to grow (values in trillions of USD, source: Haver Analytics)
This is done through bond purchases such as government bonds, corporate bonds, mortgage-backed securities, etc.
Since these purchase programmes started, which are nothing more than an indirect support of the economy by distributing Euros, Yens and Dollars to institutions and companies, real estate prices developed almost in step with the central banks' balance sheets shown above:
Similarly, real estate prices have been rising worldwide since 2010, with a slight delay. The increase in value since then has been enormous. (Source: OECD, own presentation)
How are real estate prices developing now and what does the appreciation of real estate look like in 2022?
Central banks are caught in a dilemma: On the one hand, they have to be careful to keep the burgeoning inflation in check. On the other hand, the economy is now so dependent on the central banks' drip-feed of money that "cutting off" the aid leads to an immediate weakening of the economy and consequently a recession.
This field of tension is conducive to real estate and the appreciation of real estate values.