Capital investments

Owning versus Renting: Which is More Rewarding and When?

Newsarticle image


June 2021

It was that time of year again: In June, the latest ACCENTRO Housing Cost Report was published. Now in its sixth edition, it was once again compiled by the German Economic Institute (IW) on behalf of ACCENTRO after analysing the Germany’s residential property market. To this end, the housing costs of tenants and the owner-occupied housing costs of homeowners from all of Germany’s 401 rural districts and urban districts were compared. The report shows that homeowners enjoy an average cost advantage of 56 percent over tenants and that there is still no evidence for overvaluation on the real estate market. In fact, demand for homeownership actually perked up during the coronavirus pandemic, according to the scientists.

Across Germany, Homeownership has an Average Economic Benefit of 56 Percent over Renting

On average, renting a residential property in Germany in 2020 was 56 percent more affordable nationwide than buying it. If you compare the occupancy of a condominium with a comparable rental flat, the cost advantage for owners has increased by 7.5 percent since 2019. The IW Economic Institute concludes that homeownership is more affordable in 399 of Germany’s 401 districts than for a comparable rental flat. That is true even for the German metropolises. According to the report, tenants pay an average housing price of 9.89 euros per square metre, whereas owner-occupiers pay an average of 4.32 euros per month and square metre. The net rent was used as the basis for the rental costs, while the costs of owner-occupiers are obtained by considering purchase price, incidental acquisition costs, mortgage rates and loss of interest on the equity capital, assuming the capital had been invested in other types of investment, plus maintenance costs and depreciation. According to the IW Economic Institute, it is particularly the drop of interest rates on mortgage loans that has further lowered the running costs for homeowners. The rise in property prices was not enough to outpace this trend. This translates into a substantial interest advantage for homeowners. Demand for homeownership grew in the wake of the interest rate development. The ACCENTRO Housing Cost Report names the interest rate development as a persistently stabilising factor going forward, arguing that it remains safe to expect no major interest hikes. With this in mind and with a view to the unchecked strong demand for homes, the survey authors assume that prices on the residential property market will keep going up. According to the survey, owner-occupied housing costs began to drop as early as 2018. The underlying reason was the low effective annual interest rate for mortgage loans. It declined by 22 percent over the entire aforesaid period, down to 1.54 percent. In a parallel development, owner-occupied housing costs fell by 9.0 percent. The downward trend continued throughout 2020, as interest dropped by another 22 percent. By contrast, owner-occupied housing costs decreased by 17 percent, nearly twice as fast as they had in 2019.

Findings for Germany and for the Country’s Seven Largest Cities

The Housing Cost Report diagnosed a steady downtrend in owner-occupied housing costs year on year for the seven largest cities in Germany, although the cost advantage of owner occupancy in Berlin is merely 41 percent. Homeownership in Cologne and Düsseldorf promises the maximum cost advantage among the “Big 7” cities with 65 percent and 64 percent, respectively. Frankfurt (60.6 percent), Stuttgart (58.1 percent) and Hamburg (50.2 percent) make the mid-field with costs ranging from five to ten euros per square metre of dwelling floor area. The costs are far higher in Munich with more than ten euros, resulting in a cost advantage of owner occupancy of 53.6 percent.

The COVID Effect and the Immigration Issue

During the lockdowns and curfews, people spent more time in their homes than ever before. Prof. Dr. Michael Voigtländer, Head of the Financial Markets and Real Estate Markets Competence Unit at the IW Institute, commented the fact in the report: “The coronavirus pandemic had no dampening effect on residential property prices in Germany. The pessimistic scenarios that envisioned price drops by 20 percent did not materialise. On the contrary: Homeownership rose even higher in people’s esteem as a result of COVID-19.” He added: “The incoming migration to the city is admittedly stalled. But as restrictions are relaxed in the wake of the vaccination campaigns, international migration will also gather momentum. In the medium term, major cities remain attractive markets where price growth can safely be expected to continue” (Source: Housing Cost Report 2021). For the time being, though, COVID-19 checked the incoming migration to Germany. At the last count, about 1.18 million people immigrated to Germany whereas 980,000 left the country. This is down from 1.6 million immigrants as recently as 2019. The Housing Cost Report expects the net migration for 2021 to be even lower. Demographic growth has significantly slowed, especially in the cities of Frankfurt am Main, Hamburg and Munich. The figures could rebound once the demand for skilled labour recovers, and in response to the high attractiveness of Germany’s metropolises.

Short Summary

The survey findings can be summarised as follows: Homeownership remains more affordable than renting across Germany. Even in the high-priced metropolises, homeowners benefit from demonstrable cost advantages. Moreover, the IW Economic Institute is unaware of any signs for an overvaluation of the residential property markets. Rather, the low level of interest rates and the migration into the conurbations keeps driving rents and prices up. The researchers found no evidence for adverse COVID impacts on the markets. Although the incoming migration to Germany was stalled by travel restrictions, there is reason to assume that the flow will recover in the medium term. Meanwhile, the importance of homeownership actually increased during the coronavirus pandemic, causing property prices to keep on rising despite the economic upheavals. The German Economic Institute (IW) does not believe that interest rates will seriously increase in the foreseeable future, but finds it safe to assume instead that the low level of interest rates will keep pushing up prices.

On the Methodology of the Report

The user-cost-of-housing approach employed by the survey is based on the assumption that the costs of renting should, in the long run, be level with the costs of owner-occupied homes. Essential for the data collection is the price in euros per sqm of dwelling floor area in a given district and year. The bottom line: Any decline in the owner-occupied housing costs encourages the acquisition of residential property. The housing costs of tenants are based on the basic rent net of heating. In order to determine the owner-occupied housing costs, the periodic costs are taken into account, including those for the mortgage loan, among other items. The calculation only considers the payment of interest. The repayment of the principal is ignored because it does not represent mere costs. Rather, the payments are matched by the successive acquisition of the property. Other incidental costs that are associable exclusively with the acquisition of real property and that thus enter into the cost calculation include the estate agent fee, the real estate transfer tax, the notarial charges and the entry in the land register. The report states: The higher the purchase price, the leverage and the mortgage interest are, the higher the owner-occupied housing costs will be. To be added in the case of owner-occupancy are the expenditures for maintenance, potential repairs, refurbishment and depreciation. The owner will incur these costs no matter what, because either the respective funds are spent on the capital expenditures or the value of the property deteriorates. A positive performance, by contrast, will lower the owner-occupied housing costs.

Further readings

Capital investments

Residential real estate as an investment - What is the current situation?

17. August 2023

In view of current interest rates and reports of falling real estate prices, many investors are asking themselves whether real estate continues to be a good investment. We explain why it is currently more worthwhile than ever before to enter the market.
Continue reading
Capital investments

Inflation and high interest rates - how can I afford real estate now?

28. November 2022

Higher interest rates for the first time in over ten years and steadily rising inflation - financing a property is currently more difficult than it has been for a long time. What this means for real estate buyers, is explained here.
Continue reading