An article from the series "Germany on the way to becoming an emerging market"
Hello folks!
As we did in the last survey, today we're not going to talk about stocks or markets in the direct sense, but rather about Germany's situation in the current political cosmos. Before we start, my disclaimer as always:
Disclaimer: This is not investment advice. It is also not an invitation to buy and/or sell financial products. I am merely expressing my opinion here. You are responsible for your own investments. I therefore accept no liability.
Let's start with some very nasty figures:
- 50,5%
- 1.6 million
- 40% -50%
- 5
What are these figures all about? Is it the probability that Schalke 04 will remain in the first division? Or that Bayern will win the championship after all?
Unfortunately not - the figures provide a very good picture of the tenant situation in Germany. In 2021, 50.5% of households lived as tenants 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 tenants in the year under review. Spain in particular, which is in crisis and faces various problems such as youth unemployment etc., has less than a quarter of its population as tenants. Our neighbor's neighbor is at just 24.2%. Conversely, this means that 75.8% live in an ownership relationship. At 35.35%, France is also significantly lower than Germany. Only Austria is reasonably close at 45.8%. For a long time, it feels like there is nothing at all (see (1)).
The 1.6 million are particularly relevant in this context, because in a country with such a high proportion of renters, a simple dynamic should take effect, which I explain below and should lead to a lower cost of living. Nevertheless, in 2022 there were just under 16% of households that had to spend 40% to 50% of their NET income on rent. This means that the household is considered to be "overstretched" and the problem is now getting worse every year. Whereas in 2021 it was one in eight households, it is now almost one in six households that are slipping into financial difficulties. If you compare this with the current rent burden of 27.8%, you arrive at a delta of almost double the amount that affected households have to spend on rent. New tenancy agreements from 2019 onwards have a particularly negative impact, causing costs to rise by almost 2.7% (see (1), (2)).
Why is this important?
In simplified terms, the concept of "rent" only works under the following conditions (see (3), (4), among others):
- Your own income is not sufficient to pay off the financing from repayments and interest within a reasonable time frame
- Own income is sufficient, but the real estate market is "overheated" and there is no net rental yield > 5% with a real estate investment focus
- The payment of rent + ancillary costs results in a significantly lower cost factor, so investments are made in alternative asset classes (equities, bonds, REITs, gold, etc.)
- The property is an old building that requires high maintenance reserves
These examples show us why it is not possible for some households to live within their own four walls. With reference to (4), we recognize various cost parameters in the statements:
- Repayment and loan interest rate
- 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:
Property purchase cost = loan repayment + interest repayment + maintenance costs
So why do so many people hesitate when they "only" have to show 5 annual salaries for an average apartment? This figure is less than half that of the Czech Republic, for example, with 11 (!) annual salaries, and is a burden on long-term wealth accumulation?
There is a simple answer to this: because sub-factors such as loan repayments and, in recent months, interest repayments have become immensely more expensive. If we take 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 that mean?
In 2021, the average apartment had 92.1 sqm of living space. To simplify matters, we assume that other rooms such as the area under a staircase or rooms for shared use are not considered here for the time being. This means that the apartment would cost today (see (6), (7), (8)):
92.1 sqm * €3,372 average price Q4 2022 = €310,561.20 (!)
What would this apartment have cost in 2010? It's easy, because index:
92.1 sqm * €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 increases and inflation?
The problem with this immense growth factor of almost 2 is that salaries have not kept pace. While the average net salary in 2010 was €1,638 per month, in 2021 it will be €2,172, excluding children in tax class 1. The associated salary burden was 31.8% in 2010 and 32.2% in 2021 (see (11)). Accordingly, on average an increase in salary of:
534€ was made possible. Calculated on the original salary of €1,638 per month, this is:
32.6% more, which is in contrast to the 96% more for the real estate purchase.
So we quickly realize that the payment via the average salary for 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 therefore summarize the loan repayment as follows:
- Near doubling of the price of existing properties
- No tax relief due to the taxes relevant to the salary
- No complete compensation of the real estate price development through salary increases
- Consistency in the tenant share greater than 50%
Yes, you read that right. Surprisingly, the breakdown by tenant and owner is nevertheless surprisingly constant (see (9)).
In addition to existing properties, building your own property may also be an interesting way to start owning your own home. In contrast to existing properties, the greatest individual advantage here is that all rooms and areas can be adapted according to your own ideas - no frills, no major deviations from your own expectations due to different time frames. Selected examples of this based on old buildings are (see also (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 factor surrounding asbestos in particular is a fascinating example of the divergence in the ideas mentioned. Asbestos found its way into the construction of new properties from 1930 onwards and was particularly valued for its chemical resistance, tolerance of greater heat in the house itself and, despite this, its poor combustibility. This means that real estate investors who are interested in old buildings can also become acquainted with the past. Asbestos was also previously used in car brake linings due to its robustness (see (14)).
Today this is judged quite differently. Personally, it reminds me of a shiny bling-bling solution that subsequently proved to be less advantageous. Because every strength can also be seen as a weakness. Asbestos owes its aforementioned robustness primarily to its structure - unsurprisingly. Everyone knows the yellow fiber-like blocks with a diameter of up to 2 micrometers. Few people are aware, however, that this fibrous nature means that asbestos can theoretically pose a great danger to people who are surrounded by it. It's easy to understand: since we're talking about 1/1000 of a millimeter of fibrous material, it's possible to inhale these fibers - so what? Why important (cf. ibid.)?
What goes in should come out at some point. This is difficult with asbestos - the inhaled particles may remain in the lungs, which can irritate the corresponding tissue in the long term. As early as 1936, asbestos gained the unflattering fame of a disease named after it - asbestosis. asbestosis.
Why is this important for investors?
If the decision is made not to build a house or to rent, the disillusionment is very quick - even if prices on the real estate market are falling, they are still at a record level, as explained above. At the same time, inflation remains high, forcing many - especially young families - to struggle with old properties. The issue of asbestos removal then quickly becomes a major 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). This means that as soon as houses from the 70s, 80s and sometimes even the 90s are used, the spectre of asbestos starts to haunt us. This is often a danger in the absence of an exposé or when viewing old properties without an estate agent. Not every possibly elderly owner has a financial interest in having an expert confirm the presence of asbestos in the house, which a) costs money and b) may negatively affect the value of the property. This is because the removal of asbestos always involves professional disposal. Asbestos comes in many forms, such as sewage pipes, the aforementioned insulation and also Eternit panels. A rough 0815 thumb value is approx. 30 € minimum up to 45 € per sqm (see (15), (16)).
This means that either the price of the property has to fall OR an expert has to dispose of it professionally. This can very quickly become quite expensive and be on a par with the ancillary purchase costs that are due for this property. Here is a simple example to show where the costs come from. We use cost drivers - costs in € (see (15), (16), (17)):
Transportation of the MA & equipment to the old property
-Depending on distance 50€-150€
Hire and erection of the scaffolding,
(so that the MA can reach the roof, for example)
-Depending on the scaffolding, approx. 1,000€ - 1,200€
Removal of the asbestos sheets via manpower
-Roof area 150 QM * 35€/QM (we assume 150 QM for this)
Disposal of approx. 12 tons of hazardous waste
-150€ lump sum * 12 tons
Drainage of the roof
-1.000€
Re-installation of the insulation
-Approx. 10,000€ (depending on various factors)
Installation of slates
-60€ per sqm * 150 sqm roof area
Personnel costs
4-5 days workload with approx. 3 full-time employees
You can quickly see why old buildings in particular may not be worthwhile. In this simple example with a large fluctuation interval, we have ADDITIONAL costs of:
Minimum: 28,100€ + 4 days personnel costs
Maximum: 28,400€ + 5 days of personnel costs
This often shatters the dream of an old property for young families who do not want to be tied down by this additional cost factor plus a possible disadvantage when reselling the property due to its age.
What does the state do?
For example, demanding heat pumps, offering subsidies via "climate-friendly new builds", which will already be empty in June of this year, and making a real dent in ancillary purchase costs (cf. (17), (18)).
The ancillary costs ALWAYS consist of the following components, among others (cf. (19), (20):
- Costs for the notary
- Costs for entry in the land register
- Land transfer tax
Yes, there are other parameters, but these three in particular are incurred. The land transfer tax is the one that the government could most easily tweak. There is currently a wide range here. Here are some examples:
- Bavaria with 3.5% real estate transfer tax
- Hamburg with 4.5% real estate transfer tax
- Thuringia with 6.5% real estate transfer tax
Notary and land registry fees are fairly similar throughout Germany at around 2%. The optional but frequently occurring estate agent fees are a maximum of 3.57%. As a result, there is a fairly wide range across the federal states mentioned of:
- Bavaria at 9.07% total ancillary purchase costs
- Hamburg at 10.07% total ancillary purchase costs
- Thuringia at 12.07% total ancillary purchase costs
Of course, we know that prices are currently very high in many Bavarian areas (cough Munich cough). Nevertheless, a difference of 12.07% - 9.07% = 3% for a standard property of €310,561.20 can make a big difference. In comparison, that would be approx:
310.561,20€ * 12,07% = 37.484,74€
Or
310.561,20 * 9,07% = 28.167,90€
So a delta of: 9.316,84€
Especially for families with a low income, this sum can mean an enormous relief.
If that was too much practical real estate discussion for you, you might prefer to watch my new real estate video on the REITS Realty Income, Gladstone Commercial and the Longfor Group from Hong Kong! Originated from a community wish - make a wish :D
How do you see it? Are you team owner or team tenant? I know that this is a sensitive issue. The factions are often Tenants4Life and the PropertyHoodbros are often difficult to reconcile. I just ask you to remain respectful in the comments - as always :)
Thank you 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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#longforgroup
