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User Cost of Housing Analysis of the German Real Estate Market

Author

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  • Felix Florian Balz

    (University of Finance and Administration)

Abstract

Background. This study looks at the development of the German real estate landscape, which recorded a continuous rise in prices between 2009 and 2022. These were due to a genuine excess demand, a shortage of supply and favorable financing conditions. In the course of 2022, mortgage rates then rose after a historically long period of low interest rates. Aim. This study aims in particular to assess whether the financial advantage of home ownership remains robust. The aim is to determine the relative attractiveness of home ownership compared to renting in all 401 German districts and independent cities. Methods. The owner-occupier costs are determined using the user cost of housing approach and compared with the current rental prices in the respective cities and districts. Various factors are taken into account, including the purchase price, financing costs, maintenance and rental prices. Results. The results of the analysis show that home ownership still offers a considerable cost advantage on average across Germany: In mid-2023, it is around 57% cheaper per square meter to invest than to rent. However, it is important to point out that this result does not take into account differences in the population’s ability to afford home ownership. Furthermore, the analysis raises questions about the sustainability of past house price growth and whether this increase is due to fundamental factors or low mortgage rates. In this sense, the study confirms that home ownership on the German real estate market remains economically favorable compared to renting, even with increased interest rates. It underlines how important it is to consider the long-term benefits for wealth accumulation when deciding between owning and renting. Practical relevance/social implications. The study is of practical relevance for people who rent an apartment or house in Germany and are considering whether it is sensible and economical for them to invest in property. The findings from the analysis are helpful for current purchasing decisions. Originality/value. It also offers original results and provides the reader with added value, as it captures and evaluates current real estate developments on the German market in a well-founded manner.

Suggested Citation

  • Felix Florian Balz, 2024. "User Cost of Housing Analysis of the German Real Estate Market," ACTA VSFS, University of Finance and Administration, vol. 18(1), pages 41-67.
    • Handle: RePEc:prf:journl:v:18:y:2024:i:1:p:41-67
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    File URL: https://acta.vsfs.eu/pdf/acta-2024-1-03.pdf
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    References listed on IDEAS

    as
    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    2. Demary, Markus & Voigtländer, Michael, 2018. "Reasons for the declining real interest rates," IW-Reports 47/2018, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    3. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
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    More about this item

    Keywords

    Property Price Boom; Real Estate; Real Estate Economics; Residential Property; User Cost of Housing; User Cost of Housing Analysis;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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