The rumor that Germans prefer to rent over buying a home has been largely true since World War II but in the past 20 years, things have begun to change.
While Germans are still avid renters of property, they now purchase more frequently than ever before. It’s interesting to take a look at the numerous reasons why Germans have tended to rent and why more recently, buying a home has become more popular.
The reason that Germans have traditionally rented rather than owned their homes are numerous:
- Historical and cultural reasons
- It’s what their parents tended to do
- Rent prices have traditionally remained low throughout Germany
- Houses typically didn’t appreciate in value following World War II
- House flipping and frequent moving isn’t a thing
- Aversion to holding large amounts of debt
- Vacant land is difficult to find
- Up front costs to buy a property are large
Below we’ll take a look at each reason in more detail, how each has changed over the past 20 years along with some personal experience with renting and buying property in Germany that I’ve seen firsthand.
Let’s start by elaborating on each of the 8 reasons above why renting property in Germany has been prevalent historically.
Historical and cultural reasons
Following World War II, in excess of 2 million German homes were destroyed and people were left with no place to live. Subsequent German governments embarked on a program of building rental housing that was affordable and accessible and over time, Germans became renters rather than buyers.
And given the situation in Germany at the time as a heavily damaged and defeated nation, there wasn’t any incentive for developers to build homes to sell. No one had money to buy them.
It’s generally believed that when comparing post World War II housing situations in Germany and the UK, Germany struck more of a balance between private investment and government investment. It got to the point where renting a property became the only sensible choice in Germany.
As we’ll see below, while government policies were partially responsible for the popularity of renting, there are a number of existing reasons that contributed too.
It’s what their parents tended to do
For many decades, it was the norm to rent a home rather than buy it in Germany post World War II as financially, it was the right thing to do. Plus, that’s what your parents did so kids tended to do the same with the belief that it was cheaper long term to rent than to buy.
For many decades this may have been true. Over time though, major German home builders popped up and began building houses in larger numbers and many of them were purchased to live in.
During this time, Germany has seen regional differences pop up due to various reasons including political ones. In Berlin to this day, 85% of people rent.
But across the country as a whole, Statista
reports that 29 million Germans own their own home, 36.9 million rent and 4.8 million live in shared accommodation.
It is also reported elsewhere that around 51% of Germans now own as opposed to rent. In 2013, home ownership in Germany was only 43% so it has increased even in the past few years, too. So while Germany has traditionally had among the lowest home ownership rates in the OECD, ownership is increasing.
It would seem that the current generation are far less likely to rent than their parents and grandparents.
Rent prices have traditionally remained low
It has been said that German rent prices are low but a blanket statement like is not necessarily true. You really need to look at specifics such as location and exactly what it is you’re trying to rent. Plenty of old homes and apartments exist so sure, you can find something to rent and it might be cheap-ish but you get what you pay for.
Newer housing developments are being built throughout the country perhaps more so than usual. There are plenty of new home builders and developers who exist throughout the country and when their homes are built and rented out, the rent prices aren’t necessarily cheap.
And while rent control does exist, in 2021 a rent control law in Berlin that was enacted only one year earlier was struck down by a federal court. While it was in place briefly, it didn’t seem to do much to curtail rents either as by putting a percentage limit in place to limit how much rent could be raised each year, it effectively served as the amount that the average landlord decided to increase their rent since the government basically endorsed it.
In general terms rent prices in many major German cities have increased and with supply in cities like Berlin and the Main Taunus area in Frankfurt very low, finding a place can be very difficult. And with historically low borrowing rates under 1% and 15 or 20 year mortgages easy to find, the borrowing costs of owning a home has never been cheaper.
So these days, buying a house looks better than it ever has.
Houses typically didn’t appreciate in value following World War II
Given that there weren’t many houses for sale as opposed to rent for decades after WWII, buying a house wasn’t really a thing for many decades after the war. So houses to buy weren’t that plentiful and the ones that were, tended not to appreciate.
And since renting in Germany was the norm and given the government’s organized approach to it, why bother buying anyways?
But these days, things are different. With many more home builders to choose from and more people buying homes, there is more demand and supply and prices have gone up. In a single quarter, home prices have gone up as much as 10.9% in some German cities which is the highest such increase since 2000.
While housing prices have gone up throughout the country, the biggest cities in Germany – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf – have seen even bigger increases.
And given the ongoing historically low mortgage rates, borrowing money is relatively cheap too. When you rent, you typically pay for so-called Nebenkosten – extra costs – and effectively pay the property taxes, garbage disposal fees and insurance along with utilities. You’re literally paying the owner’s mortgage for them. You might as well pay your own instead, right?
House flipping and frequent moving isn’t a thing
House flipping and frequently moving isn’t necessarily a thing in Germany like it is in North America. Mortgages are difficult to break and I know of one family who needed 30,000 Euro ($35,000) to break a mortgage on an apartment that they sold when they purchased a house.
When my family bought a house, our mortgage papers showed that if we were to break our mortgage on day 1, it would cost around 37,000 Euro or $43,000. So it’s not cheap.
Given the nebulous rules regarding capital gains on property sales, it’s another reason why Germans might be hesitant to sell their home.
Finally, given that the rental market is still very strong, there is an advantage to renting your house if you need to move elsewhere rather than selling it, too.
Aversion to holding large amounts of debt
German society is still very cash based. While credit cards are used widely, even as late as 2015 major grocery stores were just getting around to offering credit card payment options.
Many gas stations still don’t offer pay at the pump. If you have a large furniture delivery or kitchen delivery, don’t be surprised if delivery and installation costs are payable in cash only.
Debt isn’t something Germans typically like to accumulate unless it involves buying a home which as we’ve discovered in this article, isn’t necessarily something many have ever done either.
Banks also tend to be fairly conservative when lending although long mortgages of 15 – 20 years are still widely advertised and available. Again, if you’re not flipping a home you might be perfectly happy with a long mortgage.
Plus, German law says that any mortgage over 10 years in length can be broken without penalty at the 10 year mark but only by the person with the mortgage, not the lender.
And since home ownership is going up as we also discovered above, it stands to reason that Germans appear to be getting less averse to debt at least when home ownership is involved.
Finally, German banks tend not to offer the so-called sub-prime mortgages as seen in the United States and therefore the country has generally not experienced a situation like in Florida and Arizona with large defaults on mortgages that sour people on home ownership.
Vacant land is difficult to find
Vacant land to build on in Germany is difficult to find. While it’s easy to drive around the country and see large fields and empty tracts of land, many are simply unable to be built upon.
Strict laws that can last for 25 years or longer often prohibit building on the land full stop.
It’s therefore somewhat uncommon to see large scale housing developments with hundreds of houses being built as you see in the United States and Canada.
It is very common on the other hand particularly in big cities to see one old house knocked down and replaced with 2-4 houses on the same footprint.
A common practice if you’re planning on building your own home through a builder is to first locate a parcel of land to build upon, purchase it and then work with the builder erect the house.
Don’t be surprised when you see pictures of beautiful houses from small builders online complete with details and pricing. When you contact them to enquire about the home however, you find out that this is the type of home they could build for you, once you locate the land to build on.
It’s not actually a real home that has been built and is ready to sell.
Up front costs to buy a property are large
Mortgage interest isn’t tax deductible in Germany so that’s one tax advantage often afforded to home buyers that doesn’t exist.
Also, the buyer of a home pays around 10% of the price of the home (additionally) for various costs including real estate fees, lawyer costs, land transfer fees and various taxes.
While home inspectors in North American charge around $340 on average for an inspection, inspectors in Germany tend to charge by the hour and 175 Euro per hour ($200 per hour) isn’t out of the ordinary. On top of that you’ll pay for things like a written report and driving distance.
We paid over 800 Euro total for a home inspection. The guy was pleasant and gave good advice but it was highly overpriced. We didn’t get any written report either as that cost extra. He did mention that in his opinion, German home builders could be problematic in terms of quality and mentioned that he and his brother had another 120 inspections planned for the remaining quarter of the year.
Regarding real estate fees…In December 2020, German law was changed regarding who pays real estate fees. Up until this time, it was standard that the buyer pay 100% of fees. Now, no party can pay more than 50% so it’s a cost that is split between home buyer and home seller.
When you buy a home in German you definitely need to budget for large costs for closing which are on top of the purchase price.
Last thoughts on German home ownership and rentals
It’s often said in German society that you need to own a home for 10 years before you can sell it with no capital gains but this is not entirely correct. While it is true that once you’ve owned and occupied your home for 10 years you can sell it without paying capital gains you can also avoid capital gains in another way.
If you’ve solely used the home for your personal use and are not considered a commercial entity – i.e. you haven’t sold more than 3 homes in the prior 5 year period is the general rule – you can sell the home with no capital gains at any time. Of course, once you deduct selling costs, your capital gains might be very low if any, assuming you sold the house relatively quickly and it hasn’t appreciated.
If you rent the home out though, there are a few extra details to be aware of. You only need to own and reside in a home for parts of 3 years if you’ve previously rented it out.
So once your tenants move out, you only have to occupy the house for parts of 3 years – 1 day in a year, 1 full year in the following year, plus 1 additional day in the third year – to qualify.
So if you own and reside in a home for one day in the current year, all of the next year in its entirety (365 days) and then one day in the third year, you’ve fulfilled the requirement. As long as you are resident in the home for this period which is basically slightly more than 12 full months, you can sell the home without paying capital gains.
The reason this isn’t well known is that Germans don’t flip homes nor do they tend to sell them quickly after buying them. The system doesn’t really allow it and certainly doesn’t encourage it. Most Germans don’t plan to sell a home after buying it so the time period to avoid capital gains is largely something they don’t need to worry about.
To be sure, always consult a qualified German accountant before attempting to sell your property to ensure you understand possible tax implications.
Summary
While the percentage of Germans renting homes is still very high, statistics now show that more people own homes in the country than rent. Renters enjoy many protections in the German system but with interest rates at prolonged record lows and property values increasing, owning a home in the country is more attractive than previously.
Additionally, Germans appear to be more willing to take on debt than before and with many home builders actively developing throughout the country, there are plenty of options available assuming you can find a vacant lot to build on of course.
One final note: Did you know that many German homes don’t come with a fitted kitchen? You will buy most new homes in Germany with an empty space from the builder and then pay for a kitchen company to design and build your kitchen for you. I’ve written a post on building a German kitchen that speaks about my family’s experience in detail.