As we approach the September 2017 elections in Germany there is talk of a reduction in real estate acquisition taxes. In theory this would be excellent news for the German property market. When you bear in mind real estate acquisition taxes are charged by individual states, varying between 3.5% and 6.5%, they have had a major impact upon property acquisition costs. So, what should we expect as we approach the 2017 elections in Germany?
Promises, promises and more promises
We have been here on numerous occasions, right across the developed world, as we approach elections all political parties promise the earth then fail to deliver. You could be forgiven for assuming this will be the same situation in Germany but there does appear to be a groundswell of support for a reduction in real estate acquisition taxes. If you even consider a relatively inexpensive property acquisition of say €100,000 there could be an additional cost of €6500 added to your bill. Bearing in mind that the majority of mortgages require a minimum 20% deposit this €6500 “investment” is really a charge you will not get back.
Holding back German property investors
Critics of the real estate acquisition tax are adamant that this hefty additional charge has kept low to middle income earners out of the German property market. Indeed history shows that prior to the financial crisis of 2008 the performance of the German property market was benign to say the least. When you consider that home ownership across Germany is just 52.5%, compared to an EU average of 70%, perhaps there is a significant argument for reducing property purchase costs?
As we touched on above, cheap credit in light of historically low European and worldwide base rates has led to a significant increase in demand for German property. Indeed residential property investment across the country increased from €13.3 billion in 2014 to phenomenal €23.3 billion in 2015. If a significant portion of low-income and middle income investors are effectively “barred” from the real estate market, what kind of additional demand would a reduction in property transaction costs create?
It can be dangerous to base your investment strategy on historically low base rates but approaching a decade after the financial crisis there is no sign of a significant upward movement in worldwide base rates. So, we can safely assume that base rates will remain relatively low for some time to come.
German property prices
As you might expect from such a diverse country, German property price performance does vary across regions. Recent figures from the seven major cities of Germany, including Frankfurt and Berlin, show an average increase of 14.5% in property prices in 2015. Some other surveys suggest the likes of Frankfurt have seen a near 19% increase so there is certainly demand and follow up activity.
The European economy is in a relatively tricky situation at the moment due to the forthcoming UK exit from the European Union and the anxiety and concern this is causing. It will be interesting to see whether the ongoing recovery in German property prices continues into 2017 and if politicians are good to their promises of a reduction in property purchase costs.