Financial advantage decreases
Property buyers lose advantages over tenants
06/15/2023, 07:16 am
Who buys lives cheaper? For years, real estate buyers have had a financial advantage over renters. In many regions of Germany they come away cheaper overall. But the rise in interest rates is reducing this lead significantly.
According to a study, real estate buyers often had an advantage over tenants last year – but the financial advantage has fallen sharply with the rise in interest rates. This is the conclusion of the German Economic Institute (IW) in an analysis for the real estate company Accentro. This year, therefore, the picture is turning for the majority of the regions.
In particular, the study compared the scenario of buying real estate with renting on the basis of new contracts. According to this, owner-occupiers lived cheaper than tenants in 328 of the 401 German administrative districts and urban districts last year, including four of the seven major cities. They paid an average of EUR 10.04 per square meter compared to new contract rents for comparable apartments of EUR 10.90 per square meter. According to the analysis, the average cost advantage is 8.0 percent.
“We can observe the highest cost advantages in the environs of metropolises and large cities as well as in rural areas,” said IW real estate expert Michael Voigtländer. Especially around Berlin, several districts showed cost advantages for owner-occupiers of more than 20 percent in 2022. Nationwide, these were highest in the districts of Sömmerda (Thuringia), Jerichower Land (Saxony-Anhalt) and Oder-Spree (Brandenburg). According to the IW, residential real estate in Germany is also stable in value in a European comparison: their prices fluctuate less than in Great Britain, France and the Netherlands, for example.
Rise in lending rates sucks
But the study also shows how much the increase in lending rates had in the past year: In the report for 2021, the cost advantage of buyers compared to new contract rents was still around 60 percent; Back then, owners had an advantage in all regions. Above all, the rise in interest rates now ensured that owner-occupiers had to pay 10.04 per month and square meter in 2022, more than twice as much as in the previous year (4.23 euros). On the other hand, the costs for tenants increased less – from 10.30 euros to 10.90 euros.
The study calculated an annual average interest rate of 2.65 percent for loans with a ten-year fixed interest rate – but the interest rates are currently significantly higher. The IW has also calculated the regions for the first half of the year with a current average interest rate of 3.7 percent. Now the picture is changing in favor of tenants: In three quarters (300 of 401 districts) owner-occupier costs then exceed new lease rents. Buying is still cheaper in favorable rural regions, it said.
Several factors were considered for the analysis. Buyers account for the purchase price and ancillary acquisition costs such as real estate transfer tax and notary, loan interest and lost interest – because buyers could have invested the money for a property alternatively. This is based on the return on first-class corporate bonds. Costs for maintenance and depreciation were also taken into account, as well as increases in value of a maximum of three percent per year, which is calculated conservatively. On the other hand, there were net cold rents in new contracts.
Home ownership is not always good retirement provision
The authors expect inflation to fall further in the second half of the year, which makes it likely that the European Central Bank will lower the key interest rate and that construction interest rates will fall again. With an interest rate cut, the attractiveness of home ownership should “get a boost,” said Accentro boss Lars Schriewer. However, buyers would have to pay attention to economic and socio-demographic developments. “Automatic price increases are no longer guaranteed.”
The authors calculated three scenarios. The “speedy recovery” and “moderate recovery” scenarios assume the first interest rate cuts at the end of 2023 and in the first quarter of 2024, respectively. This would significantly reduce the costs for owner-occupiers. In the “Stagnation” scenario, interest rates remained the same despite falling inflation. Here, rising rents would only lead to increasing cost advantages for owners after 2024.
Owning your own home is considered good retirement provision. However, the decision between renting and buying depends on the respective living conditions, such as whether frequent professional moves are necessary. And while some people want to live independently of a landlord, others point to the advantage of not having to pay for expensive repairs or debt.
The authors emphasize that these are model calculations. Strong increases in value, such as in the real estate boom of recent years, have benefited owners more than shown in the study. On the other hand, tenants with cheap old contracts do well.
Stiftung Warentest thinks that the answer to the question “buy or rent?” depends on many assumptions, such as the assessment of the future development of rents and real estate values. Sometimes half a percent more or less can make the difference in the comparison. “There is no certainty.” The experts recommend playing through several scenarios with assumptions, especially about rental and value development, in a sample calculator.