Buying is cheaper than ever — why are there still so few owners?

Owners have a cost advantage over tenants

The question “buy or rent? “can be answered in favor of buying for almost all types of real estate and in all parts of Germany. According to a study by the Institute of German Economics (IW), which annually compares the rents and residential costs of owners in all districts and district-free cities in Germany, residential property has significant cost advantages over rental apartments. The average cost advantage of using a condominium compared to a comparable rental apartment in Germany is almost 50 percent.

According to the IW evaluation, apartment owners live cheaper than tenants in almost all cities and districts of Germany. The cost advantage that owner-occupants enjoy compared to tenants is particularly great in many major cities and metropolitan regions. For example, the costs of owners in Cologne and Düsseldorf are almost 60 percent below the housing costs of tenants. Owners also enjoy a cost advantage of over 50 percent compared to tenants in Stuttgart and Frankfurt am Main. It is also significantly cheaper to buy an apartment in Munich (cost advantage 46 percent) and Hamburg (43 percent) than to rent. Only in Berlin is the cost advantage of a condominium somewhat limited at 35 percent compared to a rented apartment.

Moderate development of purchase and rental prices despite the crisis

The extent to which the coronavirus pandemic will have an impact on the price development of real estate in Germany cannot yet be conclusively assessed. Most expert estimates assume that prices will either not fall at all or will only fall slightly.

There are two main reasons for this: On the one hand, many people are still moving to major cities in Germany. Berlin, Hamburg, Munich, Frankfurt am Main and many other major cities have been recording increasing population figures for years. Since demand for condominiums exceeds supply in almost all major cities, no sharp price declines on the real estate market can be expected, even in the face of a brief recession. On the other hand, the very low interest rates prevent a further fall in real estate prices. At present, most market observers assume that long-term interest rates will not rise in the foreseeable future. As a result, buying a property still remains a financially attractive matter.

In contrast, rents are not expected to fall in the current economic crisis. Studies from past times of crisis have shown that rents tend to stagnate in difficult economic phases, but do not fall. Against this background, even in the current situation, it cannot be assumed that renting over buying will become more attractive.

High real estate prices make buying unattractive

As described in the previous two sections, condominiums throughout Germany have a significant cost advantage over rental apartments. In addition, even in the current economic crisis, there is no sign that condominiums could become less attractive than rental apartments in the coming years. With so many advantages of buying over renting, the decisive question is why the rate of home ownership is so low in Germany.

Specifically, the home ownership rate in Germany is around 45 percent. And this has been the case for many years, according to IW research. In a Europe-wide comparison, Germany is in second to last place in terms of ownership rate. Only in Switzerland do more households live for rent. It is also becoming apparent that younger people in particular are less and less able to afford home ownership. According to IW, the rate of home owners among 35 to 44 year olds fell by five percent between 2010 and 2017. The number of people buying residential property for the first time in their lives has also fallen in recent years.

One of the main reasons for the low home ownership rate in Germany is the now high purchase prices in many places. Younger people in particular are often unable to save the equity required to buy real estate. This situation is particularly worsening in large cities, where the supply of condominiums has lagged behind demand for years and leads to consistently high prices.

Social trends such as the increase in single-person households also play a role. Singles would have to save up a great deal of capital alone in order to be able to buy a property; couples, on the other hand, can share the capital burden. The connection between the singling of life in big cities and the few owners among younger professionals who are drawn to work in expensive cities is obvious.

Benefit from income with digital real estate shares

One solution for increasing the number of owners could be the tokenization of real estate assets. Tokenization is a process in which assets are converted into so-called tokens and then converted into a blockchain network be saved and traded. The main advantage of this tokenization is the conversion of the hitherto very illiquid asset class real estate into tradable assets.

The tokens of a property represent shares in the respective real estate assets. A property value of 500,000 euros could be converted into 1,000 tokens of 500 euros each. Private investors and small investors whose assets are not yet sufficient to buy a condominium for their own use or as a capital investment can now purchase several tokens and benefit from the potential increase in value and pro rata real estate income such as rental income.

Because of their tradability, the tokens can be liquidated in any situation. By selling their tokens after a period of increasing value over several years, private investors can redeem the necessary equity to buy their first own property. Potential home buyers are therefore not bound to fixed savings periods and can flexibly dispose of their assets at any time.