May Taiwanese America

Germans and real estate
"Why is it not as important for Germans to buy real estate as it is for Taiwanese?"

“Your own stove is worth gold” is a German saying. A home of your own, that means, brings security and security. But what does “own home” mean? If you mean living in your own house or apartment by this, then most Germans do not act according to this proverb. We are a nation of tenants, not of owners. More than 50 percent of Germans live on rent. That's a lot compared to most European countries, America - and Taiwan too. Only about 20 percent of Taiwanese are tenants.

Many Taiwanese may be surprised by this. Aren't the Germans known for doing well and building wealth? Then how can it be that there are so few property owners? I think this is a prime example of cultural differences. Culture is reflected in the behavior of people and also in the laws and rules that they give to their society. It is important that the situation in Germany is not set in stone, but has been changing for a number of years. In the meantime, more Germans could understand the Taiwanese striving for real estate than ten years ago. But she would still find the prices amazing, especially in Taipei. I want to explain this with a mixture of numbers and personal observation.

After I made the decision to move to Taiwan in 2009, I quickly realized that property ownership is very important to Taiwanese people. Not only that house prices and buying a flat were a normal topic of conversation when dining with friends or family. I quickly understood that in Taiwan a condominium is expected at the latest by marriage. As a status symbol, like a well-paid job and a car. I also noticed the huge posters in the cityscape that were used to advertise new construction projects. And people who stand on street corners just to hold up large signs pointing to such buildings. I didn't know any of that from Germany.

The Germany in which I grew up looked like this: I come from a very rural area in Lower Saxony, in northwest Germany, with a lot of space and few people. With us in the village and in the small town, it is quite normal for families to have their own house with a garden around it. You can buy one for around 150,000 euros. It was my parents' generation, the baby boomers, who built many of these new homes in the 1970s and 1980s. “On the green meadow”, single-family housing estates for young families were built everywhere.

My experience has been that there was rent, especially in the larger cities. But then it was completely normal to rent a house there. I can't remember consciously visiting someone in a condominium during the 1990s, or even talking about buying a home. Sure, my friends and I, we were students and hadn't made any money ourselves. In any case, I was able to rent affordable shared rooms or small apartments in Munich as well as in Mainz and later in Hamburg - and in a good location. It wouldn't be so easy today. But I'll get to that later.

In order to understand the attitude of Germans towards real estate, one has to know their attitude towards life. It's just my opinion, but I think: For most Germans, stability and predictability are very important. Whether in personal life, in politics or on the subject of finances, the average German does not like risks and sudden changes. What he does not know or understand, he regards with skepticism. This is also how I explain to myself why smartphones only became an ubiquitous everyday item in Germany a few years later than in Taiwan. We just need a little longer to make friends with new things.

What does this have to do with real estate? Well, if you want to lead a secure life in Germany, you don't necessarily need home ownership - unlike traditionally in Taiwan. This applies to both your own apartment and real estate as an investment. And it is also due to our laws - they do not arise out of nothing, but are an expression of the collective way of thinking of a society.

Let's talk about life as a tenant. In Taiwan, and many other countries, this is a risky business. Landlords can unexpectedly cancel or raise the rents so much that you have to move out. Not for people who like things to be stable. It looks different in Germany. Our laws protect tenants pretty well and make them feel relatively safe.

One of the most important rules in German tenancy law is: The landlord can hardly terminate an open-ended tenancy agreement. That said, a tenant can usually be confident of staying in this apartment for the long term. There are many rental contracts in Germany that were concluded 30 or 40 years ago - and that is how long the tenants have lived in these apartments. In order for a landlord to be able to terminate a current lease, something special must have happened: Either there is personal use, that is, he needs the apartment for himself or a relative. Strict rules apply, and if he cheats (e.g. simply rents the apartment more expensive), he may have to pay heavy damages. Or the tenant does not pay the rent on time. In Taiwan, on the other hand, in my experience, tenants must constantly expect the landlord to cancel their contract. Even if it is not justified, many prefer to move out instead of allowing an argument.

If a tenant is now sitting in his apartment without being fired, what could still make life difficult for him? A rent increase, of course. But here too, German law protects him quite well. The landlord may increase the rent - but by a maximum of 20 percent every three years and only if he can prove that rents have also increased elsewhere. Most cities also have so-called rent indexes, which are regularly updated by the administration. In many cities, where the housing market is considered to be tense, the rent is only allowed to increase by 15 percent within three years. For many private landlords, these calculations are too complicated and they rarely increase the rent.

Only if the owner invests heavily in improving the house, for example adding balconies or adding thermal insulation to the facade, can it become significantly more expensive for the tenant in one fell swoop. In the last few years, companies like to take advantage of this, for example modernizing entire apartment blocks in Berlin. Many tenants can then no longer afford the apartment and move out.

And finally, Germans don't like to get into debt. But if you buy a property, you usually have to take out a loan. This seems too risky for many, and in fact, distress sales and foreclosures are particularly common after couples have separated or someone has become unemployed.

So these are some important reasons why more than half of Germans live in a house that does not belong to them. But what about real estate as an investment?

Those who have the money in Taiwan often put it in an apartment and hope that prices will rise and that they will be able to sell again in a few years with a hefty profit. This is often more speculation than investment - if, for example, he simply leaves the apartment empty during this time and even foregoes rental income. No wonder, I think, that many people in Taiwan get angry when they hear this. Even for everyone who would like to buy an apartment for themselves, the prices are driven up.

In Germany it is much less attractive to speculate in real estate in the short term. Laws and taxes take care of that. Every buyer has to pay real estate transfer tax immediately on the actual price. Depending on the federal state, this is between 3.5 and 6.5 percent. In addition, there are another one to two percent fees for the notary, and maybe a brokerage fee. That can be more than ten percent extra costs. This is how much the value has to increase before it is resold in order to make a profit at all. So it makes more sense to plan for the long term and rent out the apartment.

And another rule prevents speculation: If you sell an apartment in which you did not live yourself after less than ten years at a profit, you have to pay taxes on this profit. The personal income tax rate applies, and it can be over 40 percent. No wonder most investors prefer to keep their properties for at least ten years. A similar taxation has only existed in Taiwan since 2016, and it even applies for more than ten years.

Germany's real estate market has long been considered an “anomaly” in international comparison: an economically successful, safe country with a high standard of living, in which prices are only rising slowly and most people are not interested in real estate. However, that has changed significantly in the last few years, at least in certain regions.

Since around 2010, more and more Germans have been discovering real estate as an investment. That too has to do with the desire for stability and security. First of all, the global financial crisis of 2008 with the bankruptcy of the investment bank Lehman Brothers showed that money is not one hundred percent safe with banks. Then in 2010 the euro crisis broke out and for a while it looked like our currency was going to break apart. Suddenly, many Germans were worried about their assets, which they might have simply parked at a bank until then. And finally, the European Central Bank's zero interest rate policy has ensured for years that classic forms of investment such as savings books or government bonds hardly generate any returns.

Now in Germany, like in Taiwan, there are many very wealthy people, and the money has to go somewhere. Real estate suddenly became very attractive, for owner-occupation and rental. And something else happened: Foreign investors also discovered the German real estate market. Funds from America, Great Britain and many other countries have been buying into Germany for billions since then.

Suddenly, many Germans also experienced what it means to live in a tense market: First purchase prices rose from year to year, then rents too. Because investors naturally want to extract as much return as possible.

However, this trend does not affect all of Germany, but primarily popular cities and their surrounding areas. In Munich, Frankfurt, Hamburg and also Berlin, which was very cheap for a long time, prices have only climbed since 2010. And smaller cities with many students such as Mainz, Karlsruhe or Tübingen have become much more expensive. A new generation of working people is finding life in the city centers more attractive than a house on a green meadow.

At the same time, there are many areas in Germany where the trend is going in a completely different direction: rural regions from which young people migrate as soon as they have an opportunity. Because the many new city dwellers have to come from somewhere. Many of these problem regions are in eastern Germany, but they also exist in Lower Saxony, Hesse and even Bavaria. Real estate there is losing value massively, and anyone who built a house here 35 years ago doesn't get anywhere near their money back for it today.

Finally, I would like to introduce a few figures. I keep a close eye on developments in my home country and like to compare them with Taiwan. In most areas of Germany, condominiums cost between 1,000 and 3,000 euros per square meter, i.e. around 110,000 to 330,000 Taiwan dollars per ping (3.3 square meters). Only in good areas of boom cities like Munich is 5,000 euros still considered to be an acceptable price for normal living space (luxury apartments are a category of their own in Germany too). This applies to so-called existing apartments; New buildings are always significantly more expensive. In Taipei, however, 100 wan (1 million) Taiwan dollars per ping is sometimes standard. That corresponds to the equivalent of more than 9,000 euros per square meter.

Rents in Germany are usually between 5 and 10 euros per square meter per month. An apartment of 100 square meters (30 ping) costs 500 to 1000 euros, including additional costs (heating, water, property tax, etc.) about one and a half times as much. Most rental apartments are not that big, however.

When Germans buy a condo or house, they are usually willing to spend around three to five times their annual pre-tax income on it. The German average income per household is around 50,000 euros. In Taipei, on the other hand, prices are more like 15 times income. The middle class can actually no longer afford that, because the money has to be paid off with bank loans over many years. Many households in Taipei pay up to two thirds of their income for real estate loans every month. In order to make ends meet, it should not be more than a third.

That was a lot of information now. Hopefully I was able to give you an idea why home ownership is not such a big issue in Germany and why our prices are still lower than in some regions of Taiwan, despite the increase.

If you have any questions or comments, please write to me. You can find me on Facebook and Twitter as a “Taiwan Reporter”.

Copyright: Goethe-Institut Taipei
July 2017

© Klaus Bardenhagen