Rent Fetish in Germany: An Indictment of the Second-Highest-Taxing EU Country
A contribution from the series "Germany on its way to becoming an emerging market".
Hello folks!
as determined in the last survey, today we won't talk about stocks or markets in the direct sense, but will look at Germany's situation in the current political cosmos. Before we start, as always, my disclaimer:
Disclaimer: This is not investment advice. It is also not a solicitation to buy and/or sell financial products. I only describe my opinion here. You have your own responsibility towards your investments. So I also assume no liability.
Let's start with some very nasty numbers:
- 50,5%
- 1.6 million
- 40% -50%
- 5
What are these numbers all about? Is it the probability that Schalke 04 will stay in the top flight? Or that Bayern will win the championship after all?
Unfortunately, no - the figures very well encompass the tenant situation in Germany. In 2021, 50.5% of households lived in a tenant relationship and did not acquire property via their monthly installments. This makes Germany the EU leader in one discipline! No other country had such a high proportion of renters in the year under review. Above all the crisis-stricken Spain, which looks on various problems like youth unemployment etc., has under a quarter of the population as tenants. Our neighbor's neighbor is just 24.2%. Conversely, that means 75.8% live in an ownership relationship. France is also significantly lower than Germany at 35.35%. Only Austria is reasonably within reach with 45.8%. For a long time, nothing seems to happen (see (1)).
The 1.6 million are particularly relevant in this context, because in a country with such a high share of renters, a simple dynamic should take effect, which I explain below and should lead to lower living costs. Yet, in 2022, there were just under 16% of households that spent 40% to as much as 50% of their NET income on rent. This means that households are considered to be "overburdened" and the problem is now worsening on an annual basis. If it was still 2021 every eighth household, it is now almost every 6th household that slips into the financing problem. Comparing this with the current rent burden of 27.8%, we arrive at a delta of almost double that affected households have to spend on rent. In particular, new leases from 2019 onwards stand out negatively, incurring almost 2.7% more in costs (see (1), (2)).
Why is this important?
The concept of "rent" only works under the following conditions (cf. (3), (4), among others):
- The own income is not sufficient to pay off the financing from redemption and interest in a reasonable time frame.
- The own income is sufficient, however, the real estate market is "overheated" and there is no net rental return > 5% with focus real estate investment
- The payment from rent + utilities results in a much lower cost factor, so it is invested in alternative asset classes (stocks, bonds, REITs, gold, etc..)
- It is an old building property that requires high maintenance reserves
These examples show us why it is not possible for some households to live in their own 4 walls. Referring to (4), we recognize various cost parameters in the statements:
- Repayment and loan interest
- Acquisition costs and rent
- Rent and savings reserve of the tenant
- Investment return
- Maintenance
If we add these parameters together for the home buyer, we get the following equation:
Real estate purchase burden = loan repayment + interest repayment + maintenance costs.
So why do so many people hesitate, who would have to show "only" 5 annual salaries for an average apartment? This value is, for example, compared to the Czech Republic with 11 (!) annual salaries less than half as large and burdensome for long-term asset accumulation?
There is a simple answer to this: Because sub-factors such as loan repayments and, since a few months ago, interest repayments have become immensely more expensive. If we took 2010 as the standard measure for real estate prices with 100 index points, real estate would be at 196 index points in 2022 (see (5), (6)).
What does this mean?
In 2021, the average apartment had 92.1 sqm of living space. For the sake of simplicity, let's assume that other rooms such as the area under a staircase or rooms for common use are not considered here for the time being. Thus, the apartment would cost today (see (6), (7), (8)):
92.1 QM * 3,372€ average price Q4 2022 = 310,561.20€ (!)
What would this apartment have cost in 2010? It's quite easy, since index:
92.1 QM * 3,372€ average price Q4 2022 * (100 index points 2010 / 196 index points 2022) = 310,561.20€ * 0.51 =. 158.386,22€
Yes but wage increase and inflation?
The problem with this immense growth factor of almost 2 is that salaries have not kept pace. While the net average salary in 2010 was 1,638€ per month, in 2021 it is 2,172€ calculated without children in tax class 1. The related burden of the salary was 31.8% in 2010 and 32.2% in 2021 (see (11)). Accordingly, on average an increase in salary by:
534€ made possible. Calculated on the original salary of 1,638€ per month, these are:
32.6% more, which is opposed to the 96% more for the purchase of real estate.
So we quickly notice that the payment via average salary of real estate has increased by a factor of 96/33 = 2.9 to the detriment of the salary. This means that the loan repayment has increased by this factor. I summarize therefore for the loan repayment as follows:
- Near doubling of the price of existing real estate.
- No tax relief due to the taxes relevant for the salary
- No complete compensation of the real estate price development by salary increases
- Constancy in the tenant share greater than 50%
Yes, read correctly. Surprisingly, the breakdown by tenants and owners nevertheless remains remarkably constant (see (9)).
In addition to existing real estate, building your own property can also be an interesting way to start owning your own home. Contrary to the existing real estate, the adaptation of all rooms and areas according to one's own ideas is the greatest individual advantage here - no frills, no major deviations from one's own expectations due to temporally different ideas. Selected examples based on old buildings for this are (cf. among others (14)):
- high ceilings
- rotten stairs due to outdated material
- asbestos in the exterior walls
- Oil heating systems
- No insulation of the roof
- Simple glazing of windows
The very factor around asbestos is exemplary exciting for the divergence in the ideas addressed. Asbestos found its way into the construction of new properties from 1930 onwards and was highly valued, in particular, for its chemical resistance, tolerance of greater heat in the house itself and, despite this, its poor flammability. Thus, real estate investors who are interested in old buildings, may get acquainted with the past. In the past, asbestos was also used in car brake linings because of its robustness (see (14)).
Today this is judged quite differently. Personally, it reminds me of a shiny bling-bling solution that turned out to be less advantageous in retrospect. For I can also understand every strength as a weakness. Asbestos owes its mentioned robustness mainly to its structure - unsurprisingly. Everyone knows the yellow fiber-like blocks with a diameter of up to 2 micrometers. Few people, however, know that because of this fibrousness, asbestos can theoretically pose a great danger to people who are surrounded by it. It is quite easy to understand: since we are talking about 1/1000 millimeter of fibrous matter, inhalation of these fibers is possible - so what? Why important (cf. Ibid.)?
What goes in should come out at some point. This is difficult with asbestos - possibly the inhaled particles remain in the lungs, which can irritate the corresponding tissue in the long term. Asbestos thus acquired the unflattering fame of a disease named after it as early as 1936 - the Asbestosis.
Why is this important for investors?
If the decision is made not to build a house or to rent, disillusionment quickly sets in - even though prices on the real estate market are falling, they are still at a record level, as explained above. The inflation parallel remains high, so that many - straight young families - may struggle compulsorily with old building real estates. The issue of asbestos disposal then quickly becomes a significant cost driver.
Yes, but surely that's only important for your old 1930s apartments and houses?
No - the answer is no. Asbestos has only been banned since 1993. We are currently living in 2023 (at least in terms of the calendar year). As a result, as soon as homes from the 70s, 80s, and in some cases even as late as the 90s are reverted to, the specter of asbestos wanders. Often just that is with not being present an exposé or the inspection of old building real estates without brokers etc. a danger. Not every possibly aged owner has a financial interest to have an expert confirm the presence of asbestos in the house, which a) costs money and b) possibly negatively affects the value of the property. This is because the removal of asbestos is always associated with professional disposal. Asbestos knows thereby many forms such as sewage pipes, the named insulations and also Eternitplatten. A rough 0815 thumb value are thereby approx. 30 € minimum up to 45€ per QM (see (15), (16)).
Means: Either the price for the property must therefore fall OR an expert must dispose of this professionally. This can very quickly become quite expensive and on a par with the ancillary purchase costs that are due for this property. A simple example will show where the costs come from. We use cost drivers - costs in € (see (15), (16), (17)):
Transport of the MA & equipment to the old building property
-depending on the distance 50€-150€
Rent and erection of the scaffolding,
(so that the MA get to the roof e.g.)
-depending on the scaffolding approx. 1.000€ - 1.200€
Removal of the asbestos plates via Manpower
-roof area 150 QM * 35€/QM (we assume 150 QM for this)
Disposal of approx. 12 tons of hazardous waste
-150€ cost lump sum * 12 tons
Drainage of the roof
-1.000€
Re-attachment of the insulation
-approx. 10.000€ (depending on div. factors)
Installation of slates
-60€ per QM * 150 QM roof area
Personnel costs
-4-5 days workload with approx. 3 VZ MA
You can see quite quickly why especially old building properties may not be worthwhile. In this simple example with large fluctuation interval we are at ADDITIONAL costs of:
Minimum: 28.100€ + 4 days personnel costs
Maximum: 28.400€ + 5 days personnel costs
Thus very often the dream of the old building real estate shatters for young families, which do not want to tie this additional cost factor plus a possible disadvantage with the resale because of age of the real estate to the leg.
What does the state do?
E.g. heat pumps demand, promotion sums via "climatic-friendly new building" announce, which will be already empty in June this yearly and with the purchase additional expenses tidy zulangen (Cf. (17), (18)).
The ancillary costs ALWAYS consist of the following components, among others (cf. (19), (20):
- Costs for the notary
- Costs for registration in the land register
- Real estate transfer tax
Yes, there are other parameters, but just these three are incurred. The land transfer tax is the one that the government is most likely to be able to adjust. Currently, there are large ranges to be seen here. I'll give you some examples:
- Bavaria with 3.5% land transfer tax
- Hamburg with 4.5% land transfer tax
- Thuringia with 6.5% real estate transfer tax
Notary and land registry fees are reasonably similar throughout Germany at approximately 2%. The optional, but frequently occurring brokerage fees are at a maximum of 3.57%. As a result, there is quite a wide range via the aforementioned federal states of:
- Bavaria at 9.07% total ancillary purchase costs
- Hamburg with 10,07% total purchase additional costs
- Thuringia at 12.07% total additional purchase costs
Of course we know that especially in many Bavarian areas (cough Munich cough) the prices are currently very high. Nevertheless, a difference of 12.07% - 9.07% = 3% can make a lot of difference for a standard property of 310,561.20€. In comparison, that would be approx:
310.561,20€ * 12,07% = 37.484,74€
Respectively
310.561,20 * 9,07% = 28.167,90€
So a delta of: 9.316,84€
Especially for families with low income this amount can mean an enormous relief.
If this was too much practical real estate discussion for you, please have a look at my new real estate video about the REITS Realty Income, Gladstone Commercial and the Longfor Group from Hong Kong! Created from a community wish - make a wish :D
How do you see it? Are you team owners or team tenants? I know this is a sensitive topic. Often the factions are Tenant4Life and the PropertyHoodbros are difficult to get on top of each other. I just ask you to remain respectful in the comments - as always just :)
Thanks and see you next time! I look forward to your constructive feedback! :)
Your Bass-T
Sources
(4) https://zendepot.de/kaufen-oder-mieten/
(5) https://www.finanztip.de/baufinanzierung/mieten-oder-kaufen/
(7) https://www.umweltbundesamt.de/daten/private-haushalte-konsum/wohnen/wohnflaeche
(12) https://www.interhyp.de/ratgeber/was-muss-ich-wissen/zinsen/zins-charts/
(13) https://www.finanztip.de/baufinanzierung/hypothekenzinsen/
(15) https://wohnglueck.de/artikel/asbest-entsorgen-73149
(16) https://www.listando.de/p/was-kostet-eine-asbestbeseitigung/
(17) https://www.borchers-asbestkiller.de/haeufige-fragen
(18) https://www.co2online.de/modernisieren-und-bauen/waermepumpe/
(20) https://ratgeber.immowelt.de/a/nebenkosten-beim-hauskauf-oder-hausbau.html#c41785
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#immobilie
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#gladstone
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