Buying a residential property in Germany in 2021 was on average 59.2 percent cheaper than renting it nationwide. This means that the cost advantage of using an owner-occupied apartment over a comparable rented apartment has increased by about three percent compared to 2020 – this is the result of this year's ACCENTRO Housing Cost Report, the seventh edition of which was prepared in cooperation with the Institute of the German Economy (IW).
According to the study, owner-occupants live more cheaply than renters in all 401 German counties and independent cities (up from 399 last year), including metropolitan areas. They pay an average of 4.21 euros per square meter compared to new contract rents for comparable apartments of 10.30 euros per square meter per month.
The IW explains the fact that owner-occupier costs fell by 0.11 euros compared with the previous year, while prices for condominiums rose by ten percent, with the simultaneous strong increase in new contract rents and the moderate interest rate development in 2021 – as a result, even the opportunity interest rate fell. If the opportunity interest rate had remained the same, buyers would have had to expect owner-occupancy costs of 4.76 euros per square meter and thus an increase of eleven percent. The sharing of broker commissions, which was passed in 2021, has also had a relieving effect on owners.
This is why tenants pay more than owners
In its recent report, the IW identified several reasons why homeowners live more cheaply than renters. Due to the continued favorable interest rates on mortgage loans, the costs for homeowners, which were already very favorable before, have fallen once again. While purchase prices have continued to rise, not to the extent that they have outpaced the savings from lower interest rates. Tenants do not enjoy this interest rate advantage. Lars Schriewer, member of the Management Board of ACCENTRO Real Estate AG, comments:
"In the face of high real estate prices and rising rents, home ownership is still the best form of private retirement planning."
Self-users also have an advantage in metropolitan areas
Crucial owner-occupant cost benefits continued to be observed in 2021, particularly in rural areas and regions with low or moderate purchase prices. Here's how the benefits were greatest in the Sommerda district of Thuringia. But large cost advantages could also continue to be observed in high-priced metropolitan areas, which traditionally have lower owner-occupier cost advantages than rural areas.
There, the cost advantage of owner-occupiers over tenants ranges from 47.3 percent in Berlin (2020: 40.8 percent) to 53.7 percent in Hamburg (2020: 50 percent), 54.9 percent in Munich (2020: 53.4 percent), 59.3 percent in Stuttgart (2020: 57.9 percent), 63.7 percent in Frankfurt a. M. (2020: 60.4 percent), 65.7 percent in Dusseldorf (2020: 64.1 percent) up to 66.2 percent in Cologne (2020: 65 percent).
The interest rate turnaround arrives in the residential real estate market
The war in Ukraine determines the real estate market in the aftermath of the Corona pandemic. In addition to the sharp rise in energy prices and inflation, the ECB has initiated its first interest rate moves for July. However, the interest rate turnaround has already arrived in the real estate market – interest costs rose sharply. According to the study authors, this will be reflected on the market in 2022 in the form of rising self-user costs. Price declines, on the other hand, are not expected in the short term.
"The market can handle the rise in interest rates so far just fine. Rising construction costs and a continued increase in demand for the scarce commodity of condominiums are stabilizing the market," explains Prof. Dr. Michael Voigtlander of the Institute of the German Economy. "Rising interest rates, however, will significantly reduce the auto-enrollment cost benefit."
Depending on the further course of the war in Ukraine and the progress of the Corona pandemic (especially in Asia), according to the Institute of the German Economy, a decline in inflation can be expected, which would also reduce interest rates. In addition, real wages are expected to rise at least in the medium term, which will also improve the affordability of home ownership again.
Interest rate turnaround will reduce owner-occupier cost benefits
ACCENTRO's housing cost report compares three different interest rate scenarios.
- According to the study, a construction interest rate of two percent would lead to an increase in owner-occupancy costs of 66 percent to 6.97 euros per square meter.
- At a 2.5 percent interest rate, the cost of self-employment would more than double to $8.55.
- At an interest rate of three percent to 10.12 euros, an increase of 141 percentage points.
Mind you, this is assuming purchase prices remain the same – with purchase price increases on the horizon, self-occupancy costs are expected to increase again by another eight percent to 7.32 euros (two percent interest scenario), another ten percent (2.5 percent interest) to 8.97 euros or an additional twelve percent (three percent interest) to 10.63 euros.
"Self-occupancy costs will most likely increase due to the turnaround in interest rates, reducing the self-occupancy cost advantage. Over 20 years, average interest rates were four percent, much higher than today, but the real estate market was still attractive. The important thing when buying real estate is the long-term perspective, and in large parts of Germany that continues to be extremely good in view of population growth," explains Lars Schriewer. "However, even in the most ambitious interest rate scenario, owner-occupancy costs remain below expected new contract rents."
"Buying therefore remains cheaper than renting."
Metropolitan areas of the top 7 most resilient to interest rate rises
The surrounding areas of the top 7 locations show the most resilience to interest rate rises. While the worst-case interest rate scenarios in metropolitan areas and major cities lead to rental costs being exceeded by owner-occupier costs, cost advantages for buyers can still be expected in the surrounding areas of metropolitan areas and major cities as well as in other areas in Germany.
Politics must support access to property more
"In addition to the supply shortage, the interest rate turnaround now adds another bottleneck for prospective buyers. The German government should make the purchase of residential property more affordable by easing the burden of ancillary purchase costs," demands Schriewer. "Revenues from the real estate transfer tax have been rising strongly for years due to price increases alone and are even being further increased by the municipalities. There is massive potential for relief here. An allowance or other relief on ancillary costs would be conceivable."
"We reiterate our call that access to homeownership should be supported by public policy. There are numerous examples from European countries such as the UK and Belgium that provide relief on the purchase of residential property, for example, in terms of land transfer tax. Since the necessary equity capital is the most common hurdle to buying property, government-guaranteed subordinated loans and a reform of the real estate transfer tax could improve access to home ownership for middle- and low-income households," says Voigtlander.
For the Housing Cost Report, the IW compares the housing costs of owners and renters; nationwide, the rents and housing user costs of all 401 counties and independent cities were evaluated. The calculation is based on net cold rents and owner-occupier costs, which are the result of the purchase price, ancillary acquisition costs, mortgage interest and lost interest (opportunity interest) on equity, as well as repairs and erosion of value.