Buy or rent?
“The prospects for the real estate market are good”
By Laura Eßlinger
September 8, 2023, 7:24 p.m
Interest rates are high and rents are rising. Nevertheless, the prospects for the real estate market are good, says economist Michael Voigtländer. Inflation can be beneficial for buyers.
Is now a good time to buy a property?
Michael Voigtländer: That’s not an easy question to answer. Looking back, one could say: It would have been much cheaper to buy a property in 2021 when interest rates were even lower. But looking to the future, one has to say: the prospects for the real estate market are good, both for capital investors and for owner-occupiers. In the metropolitan areas in particular, we have to assume that there will continue to be a great shortage of real estate. This promises further increases in value or at least value retention. And so I wouldn’t say now per se that this is a bad time.
Which properties and locations are currently more worth buying than renting?
Michael Voigtländer is a real estate economist at the Institute of German Economics (IW) in Cologne and professor of economics at the Bonn-Rhein-Sieg University of Applied Sciences.
Energy efficiency has become a key purchase criterion for properties. Every buyer has to deal with this and make sure that the energy consumption of the apartment or house is as low as possible and that he can eventually rely on renewable energies, for example with a heat pump. As far as locations are concerned: metropolitan areas will continue to grow. We actually have positive growth prospects in all major cities, whether it’s Munich, Berlin, Hamburg, Frankfurt or Cologne. This means that the population will grow, and the surrounding communities will also grow. This is an important criterion for future demand.
In big cities, however, the prices are already high, in downtown Frankfurt the price per square meter is 8,000 euros.
Well, the longer you keep the property, the more it is worth buying, despite the high prices. But if I’m only going to be in Frankfurt temporarily for three to four years, I should think twice about it. Then I would rather say in the current phase that renting can be more worthwhile. You have relatively high transaction costs when buying. If I move out again in a relatively short period of time, I may not recoup those transaction costs despite the increase in value. The interest rate level is not attractive enough for that.
Does this mean that buying is still only worthwhile for average earners in the city if they use the property themselves?
Yes, if I have a time horizon of 15 years, then I can assume that the increases in value will be very strong. I expect interest rates to fall again in the future. This makes follow-up financing cheaper. At the moment they are so high because of inflation developments.
Will house prices go up again soon?
Rather yes. There are two important factors for the price of real estate: one is the development of rents and the other is the development of interest rates. Rents are currently rising very rapidly. This factor is currently contributing to price stability because, on the other hand, interest rates have risen sharply. The faster and the more the rents rise, the more likely further price increases are to be expected. When it comes to interest rates, the market expects them to fall sooner or later. Because inflation is so stubborn, it will drag on for a while. But I think that in the second half of this decade we will see significantly lower interest rates again. And of course that has a positive effect on real estate prices.
How has the real estate market reacted to the interest rate decisions of the ECB so far?
It is said again and again that the prices have risen so much. But if you compare this to the interest rate development, you have to realize that prices could actually have risen even more due to the interest rate development. The market was a bit more cautious back then. We even had some room for improvement when it came to prices. When interest rates rose, many expected prices to fall. But that actually compensated for the catch-up effect. This means that prices have not risen any more, but they have not fallen too much either. In this respect, we have an almost balanced market at the moment. We always look at: What does it actually cost to buy and what does it cost to rent? And we’re about equal there.
By how much would interest rates have to fall for people to be able to buy property?
We did an affordability study. It shows that in a short period of time, the burden of buying a 130 square meter apartment for a family has risen from about 30 percent of their income to 40 percent. I think interest rates would have to fall by at least one percentage point for the burden of buying to be noticeably cheaper.
Rents continue to rise. When does this stop?
I can’t encourage that. We are only now entering the phase where you notice that far too little is being built. The big cities in particular continue to grow strongly, but also smaller communities. On the other hand, construction activity is currently falling significantly. The pressure on the rental housing markets continues to increase. In some southern German cities such as Stuttgart and Munich, we see less strong increases because the markets there are already exhausted. But especially in the surrounding communities we see strong increases. I cannot imagine that the pressure on the rental housing market will really ease over the next few years. This would require more housing.
If you can and want to buy – what is the smartest way to finance the property?
Those who make the leap into ownership now have an advantage. Since we have high inflation, incomes tend to rise a little faster. This means that the high rates that I’m paying now are more or less devalued by inflation when I have corresponding wage increases. This is definitely an advantage to consider. And the other thing is: I expect interest rates to fall, and so it’s worth considering saying that I won’t commit myself to financing for ten to 15 years, but will take out a loan for part of the sum for just five years . Interest rates can be significantly lower then. But of course it comes with a certain risk. I think the chances of interest rates falling are relatively good. If you take that risk, it can be worth it.
Laura Eßlinger spoke to Michael Voigtländer