Residential real estate represents one of the most stable-valued asset classes, especially so in Germany, while the inflation protection it offers remains intact. This is the key finding of the latest ACCENTRO Housing Cost Report, now in its eighth edition and once again compiled in collaboration with the German Economic Institute (IW). In this edition, the analytic focus was on the inflation-hedging and value-preserving aspects of German residential real estate. The situation in Germany was also compared to real estate elsewhere in Europe and to other investment products.
The focus was chosen on occasion of the war in Ukraine and the rise in inflation and interest rates it triggered. In addition, the survey’s authors, Prof. Michael Voigtländer and Pekka Sagner, developed scenarios for studying the prospective interest rate development and its ramifications for the affordability of homeownership. After all, despite these vicissitudes on the real estate markets, there is one thing that remains unchanged: Even today, homeownership clearly delivers greater benefits than renting still. In cooperation with
The ACCENTRO Housing Cost Report concludes that homeownership is more affordable than renting your home in 328 out of 401 districts in Germany. What makes homeownership a paying proposition more than anything else is the brisk rental growth. That being said, the unexpectedly fast rise in interest on borrowed capital has simultaneously triggered an increase in owner-occupied housing costs. For equity-rich buyers, the current market parameters offer attractive opportunities to enter the market, according to the authors.
Despite the rise in inflation and interest rates, real estate has a significantly better inflation-hedging effect than other types of investments. Historically, it has been demonstrated time and again that rents are easy to adapt to inflation. After all, rent levels are generally paced by increases in consumer prices, while income levels have also historically been adjusted to inflation, except during recessions. Moreover, they normally exceed the inflation rate, thereby reducing the average rent load.
Particularly important for investors is the development of real rates of returns. Definitive for measuring the latter is the so-called real-money (inflation-adjusted) total return, which is calculated on the basis of rental yield and appreciation. The past few years were extraordinarily rewarding for investors in the residential market: The real-money total return between 2011 and 2021 averaged 9.1 percent, while the mean return over the entire period was 4.9 percent.
But to verify whether a given investment actually paid off you also need to take the costs for wear and tear, reinstatement and (real-money) financing costs into account. For the time being and for the medium term, it is safe to assume that total returns of less than three percent could imply losses.
Especially in Germany, rates of return and real estate prices are more stable and less susceptible to fluctuations than in other European countries. The authors attribute this primarily to Germany’s conservative financing practices and the polycentric structure of its economy.
The current cycle of tightening the main refinancing interest rate has continued for eleven months now. A retrospective shows that, in the past, the time between the final interest rate hike and the first interest rate cut never exceeded seven months and that it averaged five months. If inflation rates were to slow down noticeably during the second half of 2023, which is what most market analysts currently assume, there is a high probability that the first interest rate cut will come within six months of the final interest rate hike. If this came to pass, owner-occupied housing costs would probably decline again, whereas new-tenancy rents would keep going up on a stable level. Accordingly, the situation could improve noticeably as soon as late 2023 or early 2024.