- Five points show how dramatic the housing crisis really is
A new housing development is currently being built near the Rhine in Düsseldorf’s Heerdt district. It offers a perfect example for a comparison between property buyers and tenants, as some of the apartments are offered for sale and others for rent. The Research Institute Flossbach von Storch has Data of the apartments therefore analyzed.
A 63.5 square meter apartment for sale is offered for 460,900 euros, a similar 67.7 square meter apartment for 1,107 euros in rent. That is 7,258 euros per square meter for the purchase and 16.34 euros for the rent. Assuming that the ongoing additional costs for both apartments are likely to be similar, the analysts have now calculated whether the buyer or the renter will be better off after the expiry of a real estate loan in 30 years.
Result: The buyer, who has to spend 2,300 euros a month, would own an apartment worth 1.14 million euros in 30 years, as well as a share portfolio worth 159,000 to 371,000 euros, depending on the return. The tenant would get 950,000 to 1.44 million euros, depending on the return and lifestyle – a stalemate. Anyone who buys the apartment to rent it out is even worse off than the tenant if they cannot pay the 460,900 euros plus additional costs in cash.
The Düsseldorf example is just one indication that renters still often fare better than buyers. Flossbach von Storch has collected even more arguments for this thesis:
1. It is unclear how much prices are currently falling
All common real estate indices currently show a downturn in home ownership after the sharp price increase in the 2010s. But there are many indices and all of them can only approximate what is actually happening because comparable houses do not come onto the market in every region every quarter. This is even more likely in large cities, but in rural areas in particular so little residential property is traded that it is difficult to make reliable statements about price developments. The Postbank Residential Atlas 2024 based its prices for 2023 in ten percent of German regions on fewer than 100 offers throughout the year. The data basis also varies depending on the index. Some are based on the purchase prices that banks report to the analysis institutes, others on the notarized prices of appraisal committees. Some take factors such as year of construction, state of renovation and location into account, others do not. “In the end, the real estate wisdom applies: Buyers and sellers only know how much a house or apartment is worth after the notarial contract has been signed,” says Christof Schürmann, Senior Research Analyst at Flossbach von Storch.
2. There is still little construction going on
According to the Federal Statistical Office, 294,400 apartments will be completed in Germany in 2023. The federal government expects 265,000 apartments to be completed this year, but other estimates are lower. In any case, far too little is being built. Real estate experts estimate that there will already be a shortage of 600,000 apartments in Germany this year, and the gap is expected to grow to 800,000 by 2027. High interest rates and increased construction costs are to blame. It is unlikely that prices can be favorable for buyers in a market where supply is so severely in short supply.
3. Demand is increasing
While supply is weak, demand is increasing, albeit at a low level. The volume of loans granted by banks rose from a low of 12 billion euros in January 2023 to 19.5 billion euros this July. However, demand is still well below the record levels of 24 to 32 billion euros per month reached during the Corona and energy crises – but already above the average for the years 2003 to 2023. Rising demand also does not indicate a market that is good for buyers.
4. Real estate is more expensive than it has been in 50 years
In order to estimate whether real estate prices are low or high, the Federal Reserve of Dallas, a department of the US Federal Reserve, determines the “fundamentally justified” prices for various countries, including Germany. Indicators of fair prices include income levels, interest rates, construction costs, inflation, supply and demand, and the ratio of purchase prices to rents. According to this model, current real estate prices in Germany are far above their justified prices than they have been since data collection began in 1975 – a development that has taken off in the last 15 years in particular. In 2010, real estate was even cheaper than would have been justified.
