1.4 | The one in which we have to talk about rising real estate prices, again!

A recent series-reboot (and all its pop culture coverage) got me thinking … investing money in real estate or shoes, what’s the better deal?

Jan 27, 2022

Not to be annoying, but …. for the last time, here’s the survey link I mentioned. It’s only 11 questions and won’t take longer than 7 and a half minutes to fill out - so we’d love to hear from you! Thank youuuuu :)

And just like that … It's already the end of our new four post-structure with weekly Rente aus Stein newsletters! Can you believe it? I am starting to feel very Carrie Bradshaw-esque … staring out of the window (into the streets of Berlin, alas, not New York and definitely not wearing anything remotely fabulous) but typing away on my new swanky MacBook nonetheless. Carrie somehow never talked about her readers I guess - but I am seriously curious and would love to hear from you: How are you doing and what’s your feedback on the new structure and cadence? I couldn’t help but wonder … do you like it? What will the new year bring for all of us real estate interested folks? And how do we feel about (careful, MAJOR spoiler ahead!) Mr. Big, um, dying? I mean, nevermind all the other stuff that has come to light since the premier of the first episode in December and the somewhat controversial Peloton ad and … wow, when did celeb gossip and pop culture become so exhausting? I have to admit that I haven’t even seen the “20 years later” reboot of Sex and the City and I might actually respectfully opt out of that one entirely … but it did get me thinking back to one of the major hangups watchers and columnists alike were bemoaning when the original series came out a million years ago. If Carrie had bought less shoes and saved more money, how much NY real estate could she own by now???

Seriously, though, let’s consider (or in SatC speak) “ponder” this for a minute: Supposedly, the contents of her shoe closet at that time already were worth a whopping 40k USD. Jesus. By today’s standards, serious shoe experts (or interns writing magazine columns posing as shoe experts) estimate that it would be double that as most famous shoe designers (we are looking at you, Manolo Blahnik!) have doubled the prices for their very exclusive heels, loafers and sandals. You would think that almost 100.000 US Dollars would be a sizeable down payment on pretty much most apartments, even in NY city?! Nevermind the fact that, at least for German real estate, we wrote this newsletter telling you all about how we financed 100% of our real estate purchase, meaning Carrie would have 80.000 USD at her disposal for purchasing costs like notary and taxes alone. Crazy with a capital C - so crazy that I am looking at my pretty worn out sneakers from many years ago with even more fondness right now.

Plus, and this is the real reason Carrie was a silly goose, shoes have basically no resale value - and an apartment is the opposite of that. Which is also the reason I am talking about this in the first place. Remember how we are actually trend watching? Right. And trend number 3 for the real estate year of 2022 can be summarized as follows: Inflation is out to get us all and real estate might just be your insurance policy against that. Which in short, is another contributing factor to there not being an end to the property boom in sight.

So let’s break that down for a minute - what does inflation have to do with anything and didn’t we already talk about everything getting more expensive last week? Have you fallen victim to a scam newsletter that’s basically just pretending to tell you new things once a week now? Not really, because there’s something else I want to get at:

Let’s take a step back. When talking economics, you can distinguish between nominal value and real value - with nominal value referring to the current monetary value of something, like a currency. Nominal value, however, does not adjust for the effects of inflation, which renders the concept a bit useless when comparing values over time. That’s where the opposite - the real value - comes in. It’s also called the “relative price” and means the nominal value adjusted for inflation. Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal incomes. And one of the most significant “holders” of real value is, indeed (you guessed it) real estate. With inflation meaning that everyday items and things like electricity and gas will become more expensive, putting pressure on your wallet. . . real values are more and more in demand, almost like an insurance policy against inflation. You see what I am getting at?

How bad is it? Well, you decide for yourself: prices have gone up since March of this year according to the European Central Bank. From 1.7% in March to 2% in April and 2.3% in June to a pretty steep hike of 3.8% in July. Where are we now? Good question - at 5.2% at the end of 2021. The increase is being watched quite closely especially since inflation rates were super low the last couple of years.

A couple of interesting tidbits as we consider all this:

There really does seem to be no end in sight when it comes to rising prices for real estate. A recent study that analysed about a million notarised German purchasing contracts found that 2020 was a record breaking year in terms of money spent on property with a mind boggling 310 Million Euro changing hands (with two thirds of that spent on residential - as opposed to commercial -real estate)
Low interest rates and the now also ubiquitous fees for parking money in your account are continuously being cited as one of the main reasons that Rente aus Stein is still such a hot commodity (and I really hope that by now I don’t have to translate our titular phrase anymore) - people just really need somewhere, anywhere to invest!
There’s another reason property remains hot, hot, hot, though: Yes, even if European (and other) Central Banks are prompted by inflation to increase their interest rates (as discussed last week), that very same inflation means your real estate will be more sought after - and more valuable - than ever. So you have, voilà, (yes, I am absolutely going to say it another time) secured yourself against the risk of inflation to a degree. Another reason why a real estate purchase is probably not a bad idea
While we might think that prices are rising and rising to never before seen levels - don’t forget that compared to some other international markets, Germany is actually still rather cheap. Add to that the fact that Germany is safe, secure and politically stable and you have global investors buying German real estate more than ever, heating up the market even further

Week four and you know the drill - so what do we make of facts and stories and tidbits, how do they form a bigger picture? Well, for one we are all in the same boat when it comes to inflation - and yes, that means real estate will most likely continue to be more and more expensive but it also means, you catching my drift? Exactly, real estate will be more and more expensive. Along with most everyone out there, we do not believe that there will be a relevant downgrade in property any time soon. Sure, maybe the increase in prices isn’t going to continue quite as furiously as it has over the last few years - but real estate remains a good investment. Secondly, and this one is definitely more specific to our experience, rising prices do mean that you won’t be able to afford everything, everywhere. Obviously, that’s always been true to a degree, but it will be more pronounced. As we have said many times before, your profit depends on how “cheaply” you’ll buy.

How's it all going to go from here?! We’ll see. One thing I realised, though? Not having watched the Sex and the City reboot and thinking about my motives holds a surprising truth on the real estate front as well: I liked the original (and by that I mean “series”, even though I guess the first movie is decent enough) so very much, I don’t think any reboot would make me happy. Sex and the City, to me, was not meant to include complicated storylines about aging. So I need to be careful to not fall into the same trap with buying a house: yes the first one was perfect but I need to dare to be open minded about the next, a new iteration of that. Buying a house, the sequel. Coming to a blog near you in 2022. Carrie famously said “Beauty is fleeting, but a rent-controlled apartment overlooking the park is forever.” I guess with 40k worth of shoes in her name, she just couldn’t imagine a world even better than rent-control …

Next week, on Rente aus Stein: Believe or not, we will keep going with weekly posts! And this time, we’ll dive deeper in some of Germany’s quirks, all super relevant for your real estate endeavours.

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Disclaimer: We are not lawyers (sadly) and as such can’t give you legal and/or tax advice. We are simply telling our story in the hope that it’s inspiring to you.