Buy-to-let relationship relevant
When is the property affordable?
8/8/2018, 1:13 p.m
Rent or buy? This is an important question for many tenants. Before buying real estate, consumers need to assess their finances properly. But how does the calculation work best?
For most people, buying a home is the biggest investment of their life. The project means debt that spans decades, even though interest rates are low and construction loans from the bank are cheap. On the other hand, there are high property prices. Before taking ownership, one must therefore consider whether the family is better off financially with the dream house than with renting. How can this be calculated?
Among other things, income, credit conditions, equity and finally the possible price for your own four walls and the previous rent must be taken into account. Estate agents also work with this information. You compare purchase price and rent to determine the purchase price-rent ratio. It provides an important indication of whether the intended investment is profitable. The key figure helps the owners to assess the monthly burden and thus the home’s affordability. “The smaller the ratio between purchase price and rent, the better,” explains Jörg Sahr, editor of the magazine “Finanztest”.
Factors around 20 are good guidelines
The calculation is based on the annual coal rent, for example 9600 euros (12 times 800 euros). The purchase price, assumed to be 200,000 euros, is divided by the 9,600 euros. In the example, there is a factor of almost 21: The future owner would have to pay 9,600 euros in rent for almost 21 years before the purchase price of an apartment is reached. Objects of similar size and equipment are compared – gold taps would be unrealistic. Rental and additional purchase costs, as well as future rent increases and value increases on the desired property, are not taken into account.
Factors around 20 give a first indication that it may be better to buy than to rent. “For owners, 20 to 22 times the annual rent is a good indicator that they can afford the property,” says Sahr. The financial burden of buying your own four walls would then be little or no more than the rent. Provided buyers bring at least 20 percent equity into their project and repay their loan over 30 years at more than two percent.
According to Sahr, the ratio between purchase price and rent is often worse in cities than in rural areas. Especially in cities such as Berlin, Hamburg, Munich and Frankfurt as well as in university towns, 25 times the amount or significantly more is required. This is critical for owners because they have to dig significantly deeper into their pockets each month to purchase their own home. “It’s hardly worth it anymore,” Sahr sums up.
The Hamburg World Economic Institute came to a similar conclusion in a study for Postbank. According to this, for example, renters do better in Munich, because on average they pay a quarter of their net household income for a 70 square meter roof over their head, while buyers have to spend 44 percent of the income. In Cologne, renters are better off with 20 percent of the income compared to buyers who put 26 percent into the condominium.
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The credit must be repaid from the start of retirement
The mortgage must be repaid no later than when you retire. This goal can hardly be reached with a factor of 30, for example. Anyone buying a house at age 40 would have to pay 30% of annual rent and would be 70 years old when the property is debt free. “From a certain age, the purchase is no longer manageable to a high factor,” says Katja Meqdam, project manager for housing at real estate consultancy Bulwiengesa in Munich. A particularly low factor, on the other hand, should make you suspicious. It points to deficiencies in the property or in a relocation area.
According to Jörg Sahr, the buyers are better off in the long term. You could count on fixed installments during the term of the loan and would have planning certainty, while tenants had to count on rent increases. When the property is paid off, the house money is still due, which is usually lower than the cost of living. The fact that the tenants are initially ahead is due to the additional purchase costs. Buyers must pay for this from their own funds. It initially put a lot of pressure on the budget.
In addition to the purchase price-to-rent ratio, owners can use other indicators to measure affordability. Christian Huttenloher from the German Association for Housing, Urban Development and Regional Planning recommends looking at the municipalities’ core values. This makes it possible to compare the cost of a new building with the cost of an old building plus the cost of renovation.
The Association of Pfandbrief Banks uses the average loan amount of EUR 200,000 for a condominium as a starting point. If this loan were to bear interest at 2 percent and repay at 4 percent, the monthly burden would be 1,000 euros (200,000 times six 6 percent = 12,000 euros per year, divided by twelve months). With a cold rent of the same amount, the acquisition pays off on the bottom line. Jörg Sahr puts it differently: “When choosing different properties, the ratio between purchase price and rent is the decisive criterion.”