The Influence of Taxes and Rent Yields on Tenure Choice: New Evidence from Germany

Home ownership rates in Germany have increased substantially in recent years. However, the rate still remains on a very low level and shows significant differences across regions. The reasons for these differences and the last developments are not clear. Generally, the decision between renting and buying a house or a flat depends on multiple individual factors like income or risk awareness. Additionally, heterogeneous developments in the real estate markets, indicated by prices, rents or taxes, cause differences in the profitability and the costs of homeownership and renting. The following study analyzes the tenure choice in 402 administrative districts in Germany between 2008 and 2012 with the help of an indicator measuring the relative profitability of letting and buying. The indicator is calculated by taking into account the average rental price and the different tax treatment of tenure choice, the property prices for different administrative districts in Germany, the interest and maintenance costs (user costs of housing). Since tax benefits of landlords are passed through to tenants when competition is severe, the indicator can be used to measure the relative profitability of renting and buying. By using a panel model, we investigate whether the demand for buying or renting – measured by search profiles in ImmobilienScout 24, the leading internet platform for private real estate transactions in Germany – is shifted by changing profitability of letting and buying. Control variables like vacancy rates, demographics or employment validate the robustness of the model as well as accounting for spatial autocorrelation. Results show, that households react on changing profitability and adjust their tenure choice partially to economic factors.