The property market in Leipzig – Part 2

In Part 1 Leipzig’s 90s property boom-bust, ownership attitudes and rents were discussed. In this post I look more closely at recent price trends in residential property and then ask, “Is the market over-heating?”.

Déjà vu again

Apartment living is the dominant lifestyle in Leipzig so it makes sense to look at this segment closely. During the period 2003-2012 prices for renovated apartment blocks in Leipzig increased faster than the rent charged for single apartments. This was similar to the 90s boom-bust, although back then apartment block prices grew much faster than rents.

Apartment blocks, renovated and un-renovated, are typically bought by investment funds and professional management companies. They’re also bought by speculators with borrowed money (leverage). Just like in the 90s these entities are betting that rents will eventually catch up.

The red dots in the chart below show average rents in Leipzig while the blue bars show average prices paid for renovated apartment blocks. Over the 2003-2012 period rents increased about 6% while apartment block prices increased 15%.

Leipzig_propertyprices_vs_rents(click to enlarge)

 
Meanwhile prices for single apartments have also risen faster than rents. These are bought by people either to live in or as small investments. However there is an interesting separation in the market. Prices for ‘first sale’ (Erstverkauf) apartments, that is, brand new units (Neubau) as well as freshly modernized Altbau units increased much faster than ‘resale’ (Wiederverkauf) apartments.

The solid lines in the chart below shows prices for ‘first sale’ apartments compared to the dashed lines which shows ‘resale’.

Leipzig_apartment_prices(click to enlarge)

 

Recent years

I could only find reliable statistics up to 2012 but from watching the market over the last two years I can definitely say prices continue to go up. Rents have gone up too, but not by as much. In fact, I suspect when official statistics come out they’ll show 2013 and 2014 were record breaking years for property prices. And I think the trend for ‘first sale’ prices to increase faster than ‘resale’ has also continued.

I also note (a personal observation) that prices in the top areas of Leipzig are increasing faster than prices in the lower end. When I first moved to Leipzig an apartment in a good area was perhaps twice the price of same in a not-so-good area. Nowadays this is more like three times. In many German cities property prices in top areas are fives times or more the lower end, so this trend certainly has room to continue in Leipzig (see Table 2 here).

Is the market over-heating?

One thing is clear, prices for most residential property in Leipzig continues to rise faster than rents. And in particular single apartments in top areas have really gone up a lot in last two years. While this suggests the market (or some elements of it) is over-heating there could be other factors at play:

  • Both property prices and rents remain cheap in Leipzig compared to the rest of Germany, and exceptionally cheap compared to London, Hong Kong, Vancouver, Sydney etc. Therefore the variation between prices and rents may not indicate much.
  • Perhaps people are afraid of inflation and simply want to get out of cash and into real estate? They don’t care about rents and simply want a safe place to put savings. With suppressed interest rates and money printing by the European Central Bank (ECB) this isn’t surprising.
  • Finally, I think nowadays some Leipzigers are willing to pay a premium to own rather than rent. Owning has become trendy especially in the top areas. New and freshly renovated apartments are the most expensive type of property in Leipzig and the statistics say 60% of these are bought by locals (see end of section 4.3 here).

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For more on this topic, take a look at the Buying Property section or the Accommodation section.

6 thoughts on “The property market in Leipzig – Part 2”

  1. By encouraging this type of culture – people profiting from property- you will ruin the very thing that makes Leipzig a great place. When prices go up the diversity of demographics living within cities are squeezed, which homogenises communities. You are left with gentrified soulless living spaces in which poorer groups, artists etc are pushed out. It also makes the cost of living higher generally not just within property as rents and costs for small businesses increase. I thought this blog was supposed to be about how great Leipzig was, not yet another space where the value of property is discussed. People wanting to make investments and fast bucks from property are not what makes a city. Yet this is all people ever want to focus on, which is what has led to Berlin losing its edge.

    1. Hi Louise, I agree with pretty much all you say. Except I don’t think this post encourages a culture of speculating on property, at least I hope not. It’s intended to expose what is actually happening here – prices, rents, trends, attitudes etc – by highlighting the facts as well as offering my own observations.

  2. I think it does encourage a culture of speculatation unfortunately as it makes the discussion of property prices/ownership appear to be the norm. Just by including an article on this (already incredibly over discussed topic) it encourages it. It would be better to just ignore the entire topic, it is already a dominant point of discussion amongst most of the Anglo-phonic communities who are more or less obsessed with it and it adds nothing to the actual heart and soul of a city, quite the opposite. I am sure anybody who wants to invest in property will be able to find information elsewhere.

  3. As somebody from London who has watched the very worst of the kind of culture you describe consume the city and the once rich culture it possessed, to the point where I am now leaving, and yes, considering Leipzig as a cheap and interesting new beginning, it does distress me that you don’t take a tougher line on this phenomenon…

    P.S I love your blog, thank you for your time and work.

  4. That prices increase faster than rents at this point is entirely logical given Leipzig rents are close to the depreciation fulcrum, meaning small variations in rents have a strongly leveraged effect on prices per the discount cash flow model of intrinsic value. Let me explain:

    Property depreciates with use and age at an average rate of about 30 Euros per square meter per year or about 2.5 Euros per m2 per month. If rent stands at 5 Euros per m2, the net rent (after depreciation factored out) is 2.5 Euros per m2 (5 – 2.5 = 2.5). If rents rise by 50% to 7.5 Euros then net rent has risen to 5 Euros (7.5 -2.5 = 5), i.e. has doubled. This means the intrinsic value of the property has doubled even though the rental value has gone up by only 50%. In cities where rents are already very high (like London where it is 30 Euros/m2 per month easily), this 2.5 Euro depreciation fulcrum is far removed meaning a rise in rents simply equates a commensurate rise in intrinsic value and prices (if the market is rational).

    I bought some small investment properties in Reudnitz in 2013 speculating on exactly that. 33 m2 for 20,000 Euros, rented at 5 Euro per m2. Things like that. I knew that population growth would invariably lead to rising rents and I knew the proximity of rents to the 2.5 Euro depreciation fulcrum would give a leveraged effect on prices. In effect, I recently re-rented one such unit that came vacant in February this year at 7 Euros per m2. And I notice prices for these types of properties have almost doubled indeed since 2013. Market prices stay in line with intrinsic values at a valuation multiple of 25 to 33 (3 to% Earnings Yield). We are not going crazy yet. I expect rents to continue rising towards the 10 Euro point (at which point the intrinsic value of my properties will have tripled. Add to that some multiple expansion to maybe 50 times net rent as in Munich/Berlin – as by then we’ll be in a real bull market and people always get enthusiastic and overpay in bull markets – and the units I bought in the 20k range will be selling in the 80k – 100k. .

    I decided not to buy in Zentrum-Sud etc because these were further removed from the depreciation fulcrum. And I would never buy new built high finish. Expensive finish only means high depreciation costs. The real investment value is in the more modest East, still so today.

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