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Buy real estate in Austria, Germany

In many parts of Germany, buying real estate is more advantageous than renting. However, in some cities, the picture is gradually changing.

Erfurt. Property prices have been rising for many years. There is no end in sight. Many potential buyers wonder whether it is worth buying after many years of a booming real estate market. A study by the Cologne Institute for Economic Research (IW) seeks to provide a clear answer: in 94 percent of German districts, buying is more common than renting.

This is good news for home builders. Bad news: not everyone can afford real estate. Despite record financing conditions, the number of new buyers is decreasing. This is a bad sign for retirement planning. And in cities where real estate prices are already the highest, buying is becoming less attractive.

Residential real estate has become significantly more expensive since the financial crisis. One of the main reasons is the policy of low interest rates. As investors do not receive interest on savings deposits or safe government bonds, more and more people invest their money in real assets like real estate. The sharp rise in prices continues to this day. In only seven of Germany’s largest cities, owner-occupied apartments have increased in price by nearly 90 percent from 2010 to 2018. New rental rates have risen more slowly, only by 60 percent.

To conclude that renting is cheaper than buying, however, is considered premature by Michael Voigtländer and Jacopo Mingazzini. On average, buying is 40 percent more advantageous than renting. “It is still worth entering the housing market,” says Voigtländer.

The study examined 401 districts and independent cities in Germany. Transaction data were taken from the vdp Research database. Using the cost of living approach, Voigtländer compared the cost of renting a square meter with the cost of homeownership. The calculation included purchase costs as well as depreciation, maintenance costs, or expected future price increases. Loan repayment was not considered, as it represents ownership.

Only in 26 districts is renting more advantageous than buying. Nowhere is this more pronounced than in Hagen. Here, renters live 38 percent cheaper than owners. The biggest advantage was in buying 69% in Semmerde, a small town north of Erfurt.

But even for large cities where prices have risen particularly sharply in recent years, the study has a significant advantage in buying: the range varies from 27 percent in Berlin to 54 percent in Cologne. However, this applies only if you compare buying now with new renting, so if a move is anticipated.

Regarding existing rental rates, the picture is different for some cities: if you can stay in your apartment, you will live in Berlin 21% cheaper. In Hamburg, it is more than ten percent, and in Munich, it is still three percent.

The advantage of buying may decrease in the coming years: historically, financing conditions are still favorable. But recently, expenses have increased slightly. According to the study, combined with the sharp rise in prices, this eventually leads to “at least at the current level, living costs have exceeded their lowest levels.” The theory of the cost of housing approach is based on the assumption that buying and renting will balance each other out in the long term, explains Voigtländer. In the current situation, either rental prices need to fall, or purchase prices continue to rise sharply.

The latter is suggested by the study for large cities: in Berlin, an annual price increase of three percent is expected. Compared to several decades ago, the cost is very high. However, there is an opinion that this is still very conservative. Based on price increases in recent years, the cost could also be seven percent.

An increase in interest rates could also shift the advantage to renting. However, it is unlikely that anyone expects a significant rise in interest rates. The basis for the recent significant advantage in buying should continue to exist.

According to the latest data from the Federal Statistical Office, the share of homeowners has remained at 48 percent over the past ten years. A warning for all those who see homeownership as a cornerstone of retirement planning, but first-time buyer statistics: There were more than 700,000 renters who became owners in the year 2000, but last time there were just over 400,000. Additionally, first-time buyers are getting older. In urban areas, they are on average 48 years old. “This is far beyond the typical family clientele,” says Voigtländer.

Moreover, it is evident that the average income of this group of home buyers is rising. “This also means that households with lower incomes have little chance of entering the real estate market,” says Voigtländer. Because as purchase prices also rise, so do their dependent capital requirements from banks and associated purchase costs for realtors, land transfer tax, and notary fees.

Mingazzini provides an example for development: For a Berlin apartment that cost 90,000 euros in 2007, 270,000 euros are required today. Thus, the required equity ratio increased from 20,000 to 60,000 euros.

Consequences: “Opportunities in the real estate market increasingly depend on whether parents already own property,” says Voigtländer. “We are facing a social problem.” More and more, when buying a home, it all comes down to inheritance or parents being able to lend their property as collateral. To ease the process for buyers, the real estate economist encourages transferring broker fees to the seller, reducing property transfer taxes, and providing state guarantees for people with low capital.

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