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Homeownership Becoming More Affordable Despite Rising Prices

In spite of the unchecked price growth on the country’s real estate market, homeownership in Germany has become more affordable lately. But German apartment seekers continue to prefer renting over owning their homes. This is the upshot of a survey recently conducted by the IW German Economic Institute.1

According to the survey, it is most notably the low level of interest that drastically improved the affordability of homeownership lately, making mortgage loans cheaper and indeed overcompensating for the effect of the price growth. Prof. Dr. Michael Voigtländer, head of the competence centre for financial markets and real estate markets at the IW, explained that, while residential property prices are outpacing the rental growth at the moment, homeownership does not actually cost more than renting. Here is why: “In 38 of the 50 major cities studied, amortisation periods for mortgage loans have declined over the same period of time if you use the balance between rent payments and financing costs to repay your loan.” He went on to say that you can actually pay off your home in almost half of the 50 analysed cities within 35 years without shouldering a heavier burden than renters.

Nevertheless, Germany’s homeownership rate has steadily declined over the past years. Having stood at 48 percent in 1993, according to figures released by the empirica research firm, the rate has flatlined at around 45 percent since 2010, according to the IW survey.

Poor Government Sponsorship

The main reason cited for the persistently low homeownership rate is that homeownership in Germany is generally not getting enough government funding. Few private households have the kind of money set aside to cover the costs of buying property plus the incidental acquisition costs that come with it, such as the notarial fees and the real estate transfer tax. Only one in six tenants could make the necessary down-payment; according to IW experts, as home buyers should have saved up at least 60,000 euros in equity capital before deciding to move ahead. The percentage of those with savings this large is actually less than twelve percent in the socio-economic group of 25- to 40-year-olds, which is typically the group most likely to opt for homeownership.

One obstacle is that the employee savings allowance and the housing development subsidy, through which the government meant to support the asset building of small and medium-sized households, were not adjusted to real inflation, effectively devaluing income limits and subsidy amounts in real terms. The IW economists propose instead to support first-time property buyers with subordinated loans to make up for the lack of savings, because this would be a convenient approach in times of a persistently low interest rate environment. They pointed out that raising the homeownership rate is particularly advisable with a view to the challenges of retirement planning that are also created by the permanently low interest rates.

Incidental Acquisition Costs Higher in Germany than Abroad

Compared to other countries, the very high incidental acquisition costs in Germany are slowing things down more than anything else. In 2016, they were roughly twice as high as in the Netherlands just across the border, and four times as high as in the United Kingdom. The IW experts were most critical of the municipal levies, such as the real estate transfer tax, which buyers pay in addition to notarial and estate agent fees. They also called for a reduction of the real estate transfer tax. To this end, they proposed two models: Either to create an allowance of 100,000 euros or to tax the purchase price only to 50 percent. Calculations by the IW suggest that German municipalities collected revenue in the amount of 15.8 billion euros from the real estate transfer tax in 2019. If either of the above models were applied, it would cost local governments 1.3 billion (in the case of the allowance) or 2.7 billion euros (in the case of the tax cut) per year.

Meanwhile, the IVD German Real Estate Federation demanded that the child tax credit for first-time home buyers, a program that is set to expire by 31 March 2021, be extended indefinitely. The background to this is the assumption that homeownership has gained in standing for private households, so that interest in buying a home is likely to increase – including long-term. The IVD called on the Federal Government to show an adequate response to the trend.