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A Comparison of Renting versus Owner-Occupancy Shows: It Pays to Buy

The price growth for condominiums and free-standing homes regularly becomes subject to heated public debates. But the discussion tends to focus mostly on the fear of a possible bubble on Germany's residential property market. Especially major cities and certain mid-size cities have experienced price hikes that admittedly exceed available empirical evidence, and substantially so.

However, the ongoing debate pays little attention to the trend in owner-occupancy costs versus rental costs. Yet it is this ratio that actually holds the key to understanding the future development of the real estate markets. A recent survey that the IW German Economic Institute in Cologne conducted on behalf of ACCENTRO analysed the ratio for Germany as a whole and for selected counties, among them the country's main metropolises.

Costs of Homeownership Undercut the Rental Costs by 41 Percent on Average

The survey, which analysed rent and owner-occupancy costs in 402 counties to assess the risk of a looming bubble, shows that buying a condominium is over 40 percent more affordable than renting in Germany. Indeed, the survey findings suggest that homeownership is of financial advantage in all of the counties examined. The IW researchers concluded that this makes an overheating of Germany's housing market rather unlikely, because the very concept of an overheating housing market would presuppose that owner-occupancy costs are higher than rents. The opposite happens to be the case, though, and so there is reason to believe that the price growth will continue in the foreseeable future.

In most of the “Big Seven” cities, rents exceed the costs of owner-occupancy by far. In fact, in some of them the rates exceed the national average. Cities where the difference between owner-occupancy costs and renting is greater than the German average include, for instance, Hamburg (47.0 percent), Berlin (44.9 percent), Frankfurt am Main (43.7 percent), Cologne (42.0 percent) and Düsseldorf (41.7 percent). This means that the benefits of homeownership are particularly compelling in these cities, compared to renting. The narrowest gaps among the “Big Seven” were recorded in Munich at 34.2 percent and in Stuttgart at 34.8 percent, but even here the advantages of buying were readily apparent.

No Risk of Overheating Despite Skyrocketing Condominium Prices in Germany

This makes a sudden collapse of prices relatively improbable. Even if interest rates were to jump up abruptly, the adjustment to be expected would be no worse than moderate, according to the researchers. While there are no signs of overheating at the moment, the market should be continuously monitored because sudden changes in behaviour are not always foreseeable. This is why ACCENTRO AG has asked IW German Economic Institute in Cologne to check the market every six months from now on, using the owner-occupancy cost approach.