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%.
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’.
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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