Is buying a home wise
8 real estate mistakes you should know about
Everyone needs a roof over their heads.
But where is it written that you have to own this roof?
It goes without saying that you can build up wealth with your own home and make provisions for old age.
But there are alternatives …
In this article, you will find out why renting (plus investing in ETFs) is a sensible alternative.
In doing so, I limit myself to considering self-used Home ownership. You can find out more about rental properties here.
Notice to property owners
It is all the more important not only to see the advantages, but also not to actively ignore the disadvantages of a home that is usually financed by loans.
Myth # 1 - Now is a good time to buy because interest rates are low
That's right, and the demand is high. Quite high even if you look at the development of search queries on Google Trends:
I added the search term “buy stocks” to illustrate the extent of the ongoing real estate euphoria in relation to equity investments.
And what happens when an increasing number of buyers encounters a limited good such as residential real estate?
Correct, the prices increase.
And they have been doing that quite well for a few years, at least in the metropolitan areas.
The prices would not necessarily have to rise if the buyers were faced with a similar number of sellers.
But this is not the case, because the demand clearly exceeds the supply:
A contrary trend has been observed in recent years with building interest:
While the lending rate with a fixed interest rate for 10 years was still around 3.7% p.a. in 2009, at the beginning of 2020 it was only around 0.6% p.a.
So are the low interest rates driving up prices?
Not directly, but at least it makes more and more people believe that they can afford home ownership.
And that, in connection with diffuse fears of the effects of the euro crisis (fear of inflation), stimulates demand.
Is it already a real estate bubble?
Speculative bubbles arise when more and more people invest in the speculative object (here: real estate) in anticipation of ever increasing prices.
Since real estate is predominantly financed by outside capital, this would have to go hand in hand with a (significant) expansion of the loans granted.
This is also the case, because the real estate loans of private households in Germany had grown to 1,240 billion euros by mid-2019 (+ 29% since 2011).
In some booming metropolitan areas, one may well ask whether the next recession might not be a rude awakening ...
The question remains whether the current phase of real estate euphoria / hysteria is really a good time to buy?
Because the real estate market is also subject to it Fluctuations in value and that means:
Prices can come back fall.
Misconception # 2 - Before renting for a lot of money, it is better to pay off “something of your own”
My absolute favorite argument that fans of concrete gold reliably rub under your nose.
I hardly know a real estate buyer who does not believe in this fairy tale.
That sounds a bit like this reader comment that I found on SPON:
“With rent payments you sunk your money for no equivalent - and only finance other people's wealth accumulation. I can use the money to increase my own wealth. "
... and those of the banks, you could say.
Since owner-occupied residential property is usually financed with outside capital, quite a bit of money is due to the banks for the "capital rent" over many years.
(However, the zero interest rate policy of recent years has made money extremely cheap.)
Obviously, many people would rather pay their money to a bank than to a landlord.
apples and pears
The whole error is almost always based on a comparison of apples and pears, which reads:
Why it doesn't work out when you consider residential properties the same category compares with each other, the following example shows:
Buy vs. Rent - Example
The average cold rent for a property with 100 sqm can be found using the Düsseldorf rent index:
This is currently € 12.12 per square meter.
The average purchase price for a property of the same size is € 4,895 per square meter.
Let's count the whole thing in for Property with 100 square meters of living space by:
- Cold rent: € 1,212 / month
- Purchase price: € 489,500 plus ancillary purchase costs (approx. 10%) makes € 538,450
Sample invoice for purchase:
- Equity: € 107,690
- Loan amount: € 430,760 (80% loan-to-value ratio)
- Effective annual interest rate: 2.0%
- Fixed interest rate: 25 years
- Repayment: full repayment (no residual debt after 25 years)
The data for the annuity loan come from the mortgage lender Interhyp:
Under these conditions lies the Installment for interest and repayment at around € 2,100 per month.
There are also reserves for Maintenance costs in the amount of 1 percent per year of the new property value (1.0% x € 489,500 = € 4,895 / year = € 408 / month).
The total monthly load for the buyer is around € 2,500.
In this example, to pay off their home, the buyer needs to buy a comparable The property has around € 1,290 more per month than the tenant.
And there is a reason for that too. Because …
Purchase prices have risen (significantly) faster than rents
In 2011, the average basic rent for a 100 square meter property in Düsseldorf was € 9.17 per square meter.
In 2019 it was € 12.12. That corresponds to one Price increase of 32% in 8 years or 3.55% p.a.
In the development of purchase prices, there was significantly more "pull" in the same period:
In 2011, the purchase price for a 100 square meter property in Düsseldorf was € 2,622 per square meter.
In 2019 it was € 4,895. That corresponds to one Price increase of around 87% in 8 years or the equivalent of 8.11% p.a.
Sooner or later, prospective buyers will therefore find themselves on the funnel ...
You can not have everything
If the monthly load is not higher for buying than for renting, you have to accept compromises.
In practice this means either:
- A smaller property (nobody wants), right?
- Away from the city out in the country or at least to the outskirts (the solution preferred by most).
This city escape is often explained to friends and acquaintances with an allegedly rediscovered passion for nature, fresh air and romantic country life (v) ...
The potential Follow-up costs but you should also have it on your screen.
Amongst other things:
- the journey to work is longer. Which shouldn't be taken lightly, because commuting is stressful and can make you sick
- the children have to be driven regularly by car
- a second car is necessary
- the baker is no longer around the corner
- the cultural offer is less
Misconception # 3 - Buyers make more wealth than renters
Let's stick with the above example and assume that after 25 years, adjusted for inflation, the property has retained its original value of 489,500 euros.
(In the second part of this article, I explain why you shouldn't expect more than value retention.)
In addition to a fortune of 489,500 euros, the buyer can now look forward to rent-free (not free!) Living.
What can the tenant achieve?
After all, he has 1,290 euros more per month than the buyer. What matters is what he does with the money during this time.
If he invests his start-up capital of 107,690 euros plus 1,290 euros per month, with a net return of 3 percent (after deducting all costs, taxes and inflation) he would have assets of a good 652,000 euros after 25 years.
Such a result is definitely possible with a solid ETF portfolio and the right investment strategy.
With constant income, the tenant can therefore pay less money into his deposit each year.
Nevertheless, he reached a price of 652,000 euros higher final assets than the buyer.
In 25 years, however, the monthly rent will be around 2,538 euros (with a continuous annual rate of increase of 3 percent).
From the 652,000 euros, the tenant could rent the property for another 22 years.
Without having to rely on other sources of income (such as pension payments).
However, one skill that many people lack is crucial for building up the tenant's wealth:
Self-discipline in saving
While the buyer is disciplined by his bank to “compulsorily save”, the tenant has to resist the many temptations that the consumer society holds in front of him for his monthly available 1,290 euros.
And quite a few fail at this challenge.
Which is one of the causes of this being tenants on average Build less wealth than homeowners.
Misconception # 4 - Real estate protects against (high) inflation better than other investment objects
A misconception that persists, however.
It can be traced back to an understanding of inflation that narrows down to one single aspect: the devaluation of credit debt.
When the inflation rate rises, money loses value. And with it the debt.
But it would be naive to believe that the inflation monster is only attacking real estate loans and that the world around it goes on as usual as if nothing had happened.
The financial journalist and blogger Christian Kirchner once described this very nicely in an FTD column:
But if inflation gets out of hand, this is usually accompanied by a downturn, a corresponding number of emergency sales and a temporary drop in prices, which is why real estate prices and the inflation rate have a weakly negative correlation.
In addition, inflation increases prices and essential everyday goods.
This means that food, gas, electricity, fuel, etc. are becoming more expensive.
This means that the real estate buyer also has less money available to pay for other necessary things in addition to the loan repayment.
Anyone who has reached the limits of their financial resilience when concluding the contract and has to shoulder correspondingly high monthly payments can then quickly get stuck.
What if there is hyperinflation?
Then, as a house buyer, you shouldn't indulge yourself in the illusion that the state, together with all property owners, would be happy about the unexpected happiness of “quick debt relief”.
New taxes are levied in no time, with which homeowners can also be asked to pay later.
The financial author Gerd Kommer comes across in his book Buy or Rent? (*) to the conclusion:
Even those who are afraid of hyperinflation or even national bankruptcy can protect themselves better with a globally diversified portfolio of stocks, bonds from other countries and possibly commodities than with a single property in the country in which one receives one's current income.
The errors five to eight follow in the second part ...
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