Those who build a house or buy an apartment must initially bear a greater monthly burden than those who rent. This is true, but above all because the monthly installment includes not only interest but also the repayment of the loan taken out. However, the reimbursement serves to create wealth. For a fair comparison, the renter should set aside as a monthly savings rate the same amount that the property owner paid in repayment. And then the comparative calculation regarding the monthly net load turns out to be different again.
Additionally, loan interest rates are fixed for the fixed interest period, while rent increases over time due to inflation despite the rent cap. The law allows a rent increase of up to 20% every three years. After 20 years the rent can easily reach double the current one, while the rent for the slowly depreciated house tends towards zero.
LESS ASSET CREATION
Numerous studies conclude that in the long term, wealth creation by tenants is better than that by owners of houses and apartments. Apart from the fact that behind such comparative calculations there are always corresponding interests of the client, the result depends exclusively on the assumptions made about the future development of property prices, rents and interest rates. Of course, tenants will be better off if I assume rents won’t rise in the future, property prices will fall, and an alternative stock investment will provide a long-term 10% annual return. Everyone can judge for themselves how realistic such a scenario with volatile stock markets and inflation rates of 7% and above is.
But another point is crucial. Each of these comparative calculations assumes that a tenant saves as much money each month as the homeowner spends on loan repayments. According to all life experience, this is not true. First, when purchasing a property, developers approach the pain threshold of the maximum possible savings rate by forgoing consumption compared to a tenant who puts aside his monthly surplus. Secondly, for all forms of saving other than real estate, the temptation to temporarily suspend saving or to spend part of the saved capital on consumption is greater. Your property, however, functions like a permanent forced savings bank, so after 20 or 30 years the owners have greater assets than tenants with the same initial financial situation, simply because the property has been paid off.
Furthermore, there is another, often overlooked aspect when it comes to comparing wealth creation. While the money and stock saver must pay a 25% capital gains tax on all his income, including realized capital gains, the proceeds from the sale of a property are tax-free after 10 years. In other words, to achieve the same net return, the long-term return on capital of the comparable investment before tax must always be one third greater than the increase in value of the property.
PRE-PROGRAMMED LOSS OF VALUE
Critics of the real estate sector point out at this point that the increase in value of a property is not guaranteed and, on the contrary, in view of the decreasing population, a decline in demand for properties and therefore a decline in property prices must be assumed in the future. In contrast, there is first and foremost the serious shortage of housing. Studies from 2022 speak of a shortage of 450,000 apartments in Germany (source: Eduard Pestel Institute). This alone speaks against falling real estate prices. Furthermore, the above consideration ignores the aspect of future immigration from abroad, on which Germany depends to maintain its standard of living. In this context, further housing shortages are inevitable, but certainly not a general loss of property value. And if the property is in a good location with good infrastructure, this is an added advantage for an almost certain future increase in value.
Even assuming that the property built or purchased today for 500,000 euros will not increase in value over 30 years. Over the same period, assuming an initial monthly rent of €1,000 and inflation of just 2%, you will make almost the same amount of payments to the landlord, or almost €487,000. In this scenario, assuming you actually set aside 100% (!) of your initially invested equity capital and saved repayment, you do not need to generate a greater return on your saved capital than the loan interest paid until the loan interest rate is above 5%, to achieve the same wealth accumulation after 30 years as the initial value of the property built or purchased (source: internal calculation).
If you are interested in such comparison calculations with different assumptions: Your regional construction partner has a comparison calculator for comparing house construction and rent and will be happy to calculate different scenarios with you.
UNCERTAIN TIMES
If all comparative calculations point towards construction rather than rent, the next objection is that we live in uncertain times. You cannot commit to a house or apartment for so many years. The opposite is true. Only your home creates security and predictability. With long-term financing, costs remain constant while rents increase. Only the newly built house is more energy efficient and saves heating costs in the long term, while the renovated old apartment requires more and more energy for heating.
Even in uncertain times, financial security creates another aspect of property ownership: in old age you can live rent-free in the redeemed property. However, saved rent is the best buffer to ensure that your expected retirement income in later life rarely reaches your final gross income. In this way it is possible to maintain the standard of living achieved even in old age and represents the best way to protect oneself from poverty in old age.
Even if you have to move after 10 years due to changed living circumstances, you can rent the property or, if in doubt, sell it tax-free at a good price. So, even after deducting your debts, you will still have a nice sum that you can use to start over elsewhere.
BLOCK ON THE LEG
By deciding to own a house or apartment, you are definitely tying up the majority of your private assets. For most property owners, at least initially, a spontaneous holiday in the Maldives or even a new car are no longer possible. If this is more important to you, you will be better off as a renter. Especially because as a tenant you don’t have to worry about anything, while as the owner of a house or apartment you are responsible for the maintenance yourself.
That’s why owning your property is still not child’s play. The question is whether the house, which can be rented or sold, is no less onerous than the burden of paying a lifetime rent to the owner. In this sense, building rather than renting creates independence.
You can also design a newly built house according to your ideas and wishes. From the floor plan to the furnishings, only your taste and budget will determine your future home. No property management will dictate anything to you and no neighbors will be disturbed by your noise. This too is independence.
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