In June, it was that time again: the ACCENTRO Housing Costs Report was published. For what is now the sixth edition, the German Economic Institute (IW) once again analyzed the local housing market on behalf of ACCENTRO. To this end, the housing costs of renters were compared with the costs borne by homeowners in all 401 counties and independent cities. The report shows that homeowners enjoy an average cost advantage of 56 percent over renters and that there is still no overvaluation in the real estate market. According to the researchers, demand for home ownership has actually increased during the COVID-19 pandemic.
On average across the country, homeownership is 56 percent less expensive than renting
On a nationwide average, renting a residential property in Germany in 2020 was 56 percent cheaper than buying one. When comparing the cost of owning a condominium with that of a comparable rental apartment, the cost advantage for owners increased by 7.5 percent compared to 2019. The IW concludes that in 399 of 401 German districts, homeownership is more affordable than renting a similar apartment. This also applies to Germany’s major cities. According to the report, renters pay an average rent of 9.89 euros per square meter, while homeowners pay an average of 4.32 euros per month per square meter. The base for rental costs was the base rent; the costs for homeowners are calculated based on the purchase price, incidental purchase costs, mortgage interest, and lost interest on equity—for example, if it had been invested in other types of assets—as well as maintenance and depreciation.
According to the IW, the decline in mortgage interest rates in particular is further reducing homeowners’ ongoing costs. Rising real estate prices were unable to offset this trend. This resulted in a significant interest rate advantage for homeowners. As a result of these interest rate trends, demand for homeownership also increased. The ACCENTRO Housing Costs Report cites interest rate trends as a factor that will continue to stabilize the market in the future. This is because a sharp rise in interest rates is still not expected. Based on this and on continued high demand for homeownership, the authors of the study anticipate that prices in the residential real estate market will continue to rise.
According to the study, owner-occupier costs began to fall as early as 2018. This was due to low effective annual interest rates on mortgage loans, which fell by 22 percent to 1.54 percent during the period in question. At the same time, owner-occupier costs fell by 9.0 percent. In 2020, the decline continued, with interest rates falling another 21 percent. Owner-occupier costs, on the other hand, decreased by 17 percent—nearly twice as much as in 2019.
The results for Germany and its seven largest cities
For Germany’s seven largest cities as well, the Housing Cost Report notes a steady downward trend in owner-occupier costs compared to the previous year—though for Berlin, the cost advantage for owner-occupiers is only 41 percent. Among the top seven cities, buyers in Cologne and Düsseldorf enjoy the greatest cost advantages, at 65 and 64 percent, respectively. In the middle of the pack are Frankfurt (60.6%), Stuttgart (58.1%), and Hamburg (50.2%), with costs ranging from five to ten euros per square meter of living space. In Munich, on the other hand, costs are well over ten euros; there, the cost advantage for owner-occupiers is 53.6%.
The Impact of the Coronavirus and the Issue of Immigration
During the lockdowns and stay-at-home orders, people spent more time in their homes than ever before. Prof. Dr. Michael Voigtländer, head of the IW’s Financial and Real Estate Markets Research Group, explains in the report: “The COVID-19 pandemic did not have a dampening effect on residential real estate prices in Germany. The pessimistic scenarios predicting 20 percent price declines did not materialize. On the contrary: Homeownership has gained additional value as a result of the pandemic.” He adds: “While migration into cities has paused for now, international migration will gain momentum as restrictions are eased in the wake of vaccination campaigns. In the medium term, major cities remain attractive markets where price increases are still expected” (Source: Housing Costs Report 2021). COVID-19 has temporarily slowed immigration to Germany. Most recently, approximately 1.18 million people immigrated, while 980,000 left the country. In 2019, there were still 1.6 million immigrants. According to the Housing Cost Report’s projections, net immigration figures will be even lower in 2021. Population growth has declined significantly, particularly in the cities of Frankfurt am Main, Hamburg, and Munich. The resurgent demand for skilled workers and the high appeal of German metropolitan areas could spur a recovery.
In a nutshell
In conclusion, it can be stated that, throughout Germany, homeownership remains more affordable than renting. Even in high-cost metropolitan areas, significant cost advantages for homeowners can be observed. Furthermore, the IW sees no signs of an overvaluation in the residential real estate markets. Rather, low interest rates and migration into metropolitan areas continue to drive up rental and purchase prices. The researchers found no negative impact of the coronavirus on the markets. While immigration to Germany stagnated as a result of travel restrictions, they expect a recovery in the medium term. Furthermore, the importance of homeownership has increased during the COVID-19 pandemic—as a result, home prices continued to rise despite the economic turmoil. The IW does not expect interest rates to rise sharply in the foreseeable future; rather, it is likely that low interest rates will lead to further price increases.
About the Report's Methodology
The owner-occupier cost approach used in the report is based on the assumption that the costs of renting and owning one’s own home should be equivalent over the long term. A key factor in data collection is the purchase price in euros per square meter of living space in the respective county and year. The following applies: If these owner-occupier costs decline, this is advantageous for homebuyers.
The costs for renters are determined by the net base rent. To calculate the owner-occupier costs for homeowners, regularly incurred expenses—such as the financing of a mortgage—are taken into account. Only interest payments are considered here. Principal payments are excluded, as they are not pure costs but rather represent the gradual acquisition of the property. Other ancillary costs associated exclusively with the purchase of real estate and included in the cost calculation are real estate agent fees, real estate transfer tax, notary fees, and land registry registration fees. The report states: The higher the purchase price, the proportion of debt financing, and the mortgage interest rates, the higher the owner-occupier costs. In addition, for owner-occupied properties, there are costs for maintenance, potential repairs, renovations, and depreciation. The owner incurs costs in any case, as either the property’s value decreases or funds must be raised for investments. A positive change in value, on the other hand, reduces the costs for owner-occupiers.
