The purpose of the user-cost-of-housing approach is to compare rental costs with the recurrent costs borne by homeowners. While the approach is used to determine the relative economic benefit of owning your home outright versus renting your home, it also identifies over- or under-valuations in the market.
Over the past year, interest rates for mortgage loans experienced another significant drop, whereas the returns on alternative investments declined as well. Both of these trends caused owner-occupied housing costs to decline last year. In many parts of Germany, the plunge in mortgage interest has also prevented a rise in annuity, meaning the sum of interest and capital repayment that borrowers shoulder to finance a mortgage loan. The development of this parameter, which is decisive for the user-cost-of-housing approach, may also help to explain why prices for residential real estate just kept on going up last year. The price growth seen last year despite the uncertainties associated with the coronavirus pandemic therefore comes as no surprise from the angle of the user-cost-of-housing approach, as it reflects the persistent undervaluation of residential real estate in Germany.
In the wake of the pandemic, the incoming migration to Germany declined last year, slowing the demographic growth as a whole. The migration flow is, however, expected to rebound and rise again in the medium term, and the country's major cities in particular will remain relevant target regions for both internal and external migrants. A permanent reversal of the demographics in Germany's major cities is therefore not to be expected in the medium term.
The ACCENTRO Housing Cost Report 2021 represents the sixth annual edition of the report. At its core, the report compares the housing costs borne by owner-occupiers with rental costs paid by tenants. Comparing the costs of these two accommodation options is not just highly interesting from a personal point of view, but also permits conclusions about the housing market in general. This edition also marks the second time that the Accentro Housing Cost Report is published during the ongoing coronavirus pandemic, which has impacted Germany as much as the rest of the world. By the first half of 2021, meaning the time of the report's publication, the vaccination campaign has gathered momentum in Germany, so that it is reasonable to assume that dining, shopping and travelling will become easier before the end of this year. Hopes are running high that the pandemic will be overcome soon.
In its opening section, last year's Housing Cost Report discussed the potential ramifications of the coronavirus pandemic for residential property markets. Based on the report findings, it was assumed at the time that the coro- navirus pandemic would not cause an abrupt deterioration of prices on the market (see Sagner/Voigtländer, 2020). As it turned out, prices on the homeownership market did continue to rally in 2020, and significantly so. This coincides with the insight that owner-occupied housing costs continued to decline last year while the economic benefits of homeownership over renting kept rising. The reason for this, in addition to yet another substantial interest rate drop for mortgage loans, is not least a decline in opportunity interest rates, as the economic turbulences of the year behind us also struck deep
This year's report will venture a look at post-pandemic times. In particular, it will discuss the repercussions for international migration and its implications for German cities. Immigration from abroad has played a key role in the real estate boom that Germany experienced over the past decade. Based on provisional figures released by the Federal Statistical Office (Destatis), Germany's incoming migration took a nosedive in 2020, thereby slowing the population growth of prior years. The strong migration flow seen during the past decade appears to be ebbing. However, demographic forecast are predicting significant growth rates in the years ahead, especially for the major German cities. There are sound reasons for it, and a reversal in the demographics of the cities is not be expected in the medium term.
The other parts of the report are structured as follows: First, the methodology underlying the user-cost-of-housing approach is elaborated and illustrated using an exam- ple. Next, the results for the nationwide average and Ger- many's seven largest cities are presented over time, followed by the results for Germany's rural districts. The report will then move on to present the results of the annuity calculation, which put the results of the user-cost-of-housing calculation into perspective. Finally, the implications of the coronavirus pandemic for the incoming migration to Germany, and for the migration flow within Germany, will be discussed before the report concludes with a medium-term outlook for the post-pandemic development.
2. Owner-Occupied-Housing Costs
2.1 Notes on the Methods Used
Making Rents and Owner-Occupancy Costs Comparable
The effort to make the costs of renting and those of owner -occupying your own property comparable necessitates a few assumptions regarding the situation of owner -occupiers. The costs of renting are directly obtained from the respective rent level. The section below will compare the costs of letting or occupying residential accommodation, respectively. On the tenant side, the comparison will use the base rent before heating costs as benchmark. Unlike tenants, owner-occupiers need to factor various individual line items into the calculation of their housing costs. The approach taken to calculate the owner-occupied housing costs are based on the studies conducted by Poterba (1984) and Himmelberg et al. (2005). Included in the owner-occupied housing costs are expenses regularly incurred by the owner, such as, for instance, the costs associated with the debt financing of a mortgage loan. Here, it is important to differentiate between the financing costs, meaning the payment of interest and the capital repayment. The capital repayment component is not part of the owner-occupied housing costs because its purpose is wealth-building. It is excluded from the comparison because the tenant side lacks
wealth-buildingaspect. The components of the own- er-occupied housing costs break down into various com- ponents, and can be represented in mathematical form as follows:
SNKk,t= Pk,t ∙ (b ∙ iF,t) + Pk,t∙ (s + a) - Pk,t ∙ ∆Pk
The owner-occupied housing costs SNK are determined on the level of Germany's 401 rural and urban districts k for a given year t. Of key importance when determining the owner-occupied housing costs is the purchase price P of the owned property, quoted in euros per square metre of dwelling floor area in a given district and year. A certain share b of the price is borrowed, subject to a borrowing rate of iF. The higher the purchase price, the leverage and the mortgage interest are, the higher the owner- occupied housing costs are bound to be. Unlike tenants,
Survey compiled for ACCENTRO Real Estate AG
Housing Cost Report 2021
property owners must also factor in the costs of maintenance s and amortisation a which will cause the value of the property to deteriorate over time unless the necessary capital expenditures are made. This cost item should therefore be considered on an opportunity basis. Either the capital expenditures are actually made, keeping the property value stable, or they are skipped, causing the property value to decline. Thus, the costs are incurred either way. This is matched by the performance ΔPk of the property. A positive performance will lower the owner -occupied housing costs. It should be noted that the equity interest 1 - b in the property financing arrangement could have been invested on the capital market rather than in real estate. The calculation imputes that the alternative investment would pay interest at a rate of iA . Interest income from the alternative investment would be taxable at a rate of τ. In addition, buying property generates incidental acquisition costs. These include the es-
The data include initial selling prices or resale prices of fully refurbished period flats in good locations and with high-spec interior fit-outs, on the one hand, and new-tenancy rents for comparable flats, on the other hand. The calculation of the owner-occupied housing costs also takes account of appreciation. The anticipated long-term appreciation we use is based on the data by F + B (2021). These data let us analyse the extended time horizon from 2005 through 2020. This is done by measuring the average annual performance per rural district or urban dis- trict, as the case may be. The analysed time period includes both the Zero Years, a time when the property price level was actually regressive in parts of Germany, and the more recent boom decade. In order to keep the fast price growth rates of recent years from attaining to much weight, the price growth rate is capped at an annual maximum of three percent.
Variables and Data Sources
Purchase price, in euros per sqm of dwelling floor area
Debt capital share
Dr. Klein (2021)
Mortgage interest rate
Deutsche Bundesbank (2021a)
Current yields, bearer bonds
Deutsche Bundesbank (2021b)
Purchase price changes
Source: German Economic Institute (IW)
Calculation of Owner-Occupied Housing
Costs, Using an Example
tate agent fee m, the real estate transfer tax g as well as the notary fee n and the charges for entering the title in the land register e. The incidental acquisition costs, just like the equity paid down, could have been spent on an alternative investment. Any income from that would also be subject to taxation. The higher the imputed interest on the alternative investment, the higher the owner-occupied housing costs. Finally considered is the fact that the incidental acquisition costs have no equivalent value in the form of a property asset. In order to be able to take these costs into account, it is assumed that the financing markets are fully flexible, and that even the equity capital share is debt-financed and subject to debt interest. This aspect is new and was not considered in the calculations of prior years.
Below, the owner-occupied housing costs are measured for each of Germany's 401 rural and urban districts. The measurement presupposes knowledge of the regional property prices. The property prices used are obtained from two different data sources. To permit a direct comparison of owner-occupied housing costs and rents, the respective prices and rents obviously need to reference comparable properties. Actually sold and rented residential properties can differ considerably from one region to the next, and over time. So, in order to ensure that properties are actually comparable, the survey relies on hedonic prices.
The percentage of the equity capital share, the survey relies on diverse publications by financial intermediary Dr. Klein, whose figures are in turn taken from real estate financing arrangements handled by the Europace plat- form.
The higher the average equity capital commitment, the lower the owner-occupied housing costs. In this regard, we impute a uniform average value for all rural districts and urban districts in a given year. It should be noted that significantly lower equity shares are also associated with interest rate markups. These interest rates also represent imputed average values without regional differentiation. The interest rates imputed in the calculations are obtained from surveys of Deutsche Bundesbank.
The mortgage interest rate we applied represents the average effective interest rate that German banks charge for housing loans to private households with an initial fixed interest period of more than ten years (Deutsche Bundesbank, 2021b). The average current yields of domestic bearer bonds are used as opportunity interest rate for the investment (Deutsche Bundesbank, 2021a). These returns would have to be taxed, and the average tax rate assumed here matches the definition used for Germany's financial statistics in this context (Federal Ministry of Finance, 2020).
The level of the incidental acquisition costs varies from one German state to the next. Depending on the state, the real estate transfer tax rate ranges from 3.5 percent in Saxony and Bavaria to 6.5 percent in Brandenburg and Schleswig-Holstein. Aside from the real estate transfer tax, the estate agent's fee is also subject to serious regional differences. Prior to the introduction of the"Act on the Distribution of Estate Agent Fees for Brokering Sales and Purchase Agreements for Flats and Single-Family Homes" (see Federal Law Gazette I 2020, p. 1245) on 23 December 2020, buyers used to have to pay the entire agent's fee of up to 7.14 percent of the purchase price in some regions. This used to be the case in Berlin and Brandenburg, for instance. In other states, such as Bavar- ia, the agent's fee used to be split between buyer and seller. The introduction of the new law has considerably lowered the agents' fee for buyers in some areas (see Sagner/Voigtländer, 2021). Since this year's survey only considered annual values up to and including 2020, the changes are not yet reflected in the measurement of the owner-occupied housing costs. The costs of the land register entry and the notarial charges are assumed to be uniform nationwide.
The example below illustrates the measurement of the owner-occupied housing costs. As key parameter of the owner-occupied housing costs, a price of 4,000 euros per square metre of dwelling floor area is imputed. The incidental acquisition costs break down into the real estate transfer tax, whose rate varies from one region to the next and which is assumed to be six percent in the case at hand, as well as the estate agent's fee, which is also subject to regional differences and here assumed to be 3.57 percent, plus costs for the land register entry and the notarial charges, assumed to be an aggregate amount equal to 1.525 percent. All things considered, the incidental acquisition costs in the example add up to 11 percent or 444 euros per square metre. The assumed leverage equals around 85 percent. The borrowed capital is subject to an annual interest rate of 1.2 percent. The remaining 15 percent of the purchase price, which represents the equity capital paid down, generate opportunity costs in an amount of 1.75 percent. This rate reflects the average current yield rate paid on domestic bearer bonds, which dropped by 0.75 percentage points between 2019 and the pandemic year of 2020. This sort of interest income would be taxable. To calculate the tax dues, the average tax rate according to the delimitation used in the financial statistics of 2019 was adopted for 2020. The rate was 23.2 percent. Another assumption used in the example is a long-term price growth rate of 2.5 percent annu- ally. Maintenance costs equal to 1.0 percent and a depreciation rate of 2.0 percent were also assumed. Based on all of these assumptions, the calculation of the owner -occupied housing costs returned the following results:
For a flat of 100 square metres, it identified owner-occupied housing costs of 8,015 euros per year or 6.68 euros per square metre and month. Assuming a monthly rent rate of 9.00 euros per square metre for an equivalent flat, the cost advantage of owner occupancy would equal 26 percent.
Separating Owner-Occupied Housing Costs
from the Annuity Calculation
Findings for Germany
Trend in owner-occupied-housing costs and rents 1)
Population-weighted German 2) average, in euros per square metre of dwelling floor area and month
New tenancy rents
As mentioned above, the capital repayment component of the financing arrangement is ignored in the context of owner-occupied housing costs because it serves a wealth-building purpose. The interest payments represent costs charged by the bank for making the borrowed capital available. The capital repayment component, by contrast, generates no economic benefit for the bank, and it is directly matched by the equivalent value of the purchased property. In classic annuity accounting, these two components are merged. After all, their sum represent the amount that has to be paid to the lender on a monthly basis. The annuity level becomes relevant when a given household has to decide how much of the household income can be spent on mortgage financing.
But this is not the fundamental idea underlying the user- cost-of-housing approach. Rather, it is based on the premise that the costs of renting a home should, in the long-term, match the costs of inhabiting an owner-occupied home. This means that only the cost components are of relevance. The classic annuity calculation only considers the debt capital interest as costs. By contrast, the owner-occupied housing cost approach takes opportunity costs into account, too. Opportunity costs represent the costs that are generated by the fact that capital is tied up in the property. Also taken into account are hypothetical returns that could have been generated if the capital had been spent on an investment product with a similar risk profile. Another aspect that the annuity calculation fails to consider are the costs for refurbishments and de- preciations, nor does it include the appreciation of the property.
That said, the annuity calculation still serves an important purpose. Potential property buyers are therefore well advised not to consider either one of the two approaches in isolation. The section below will therefore include the results of a classic annuity calculation, too.
The nationwide average in owner-occupied housing costs has declined year on year, as Figure 2.1 shows. In 2020, the owner-occupied housing costs averaged 4.32 euros, whereas new-tenancy rents for comparable flats averaged 9.89 euros. This translates into a cost advantage of 56 percent. The only time during the past 10 years that registered a steeper drop in owner-occupied housing costs was between 2014 and 2015. Between 2015 and 2018, owner-occupied housing costs suffered a trend re- versal. The level of interest rates remained more or less unchanged during this period, whereas selling prices kept rising. But a short while later, between 2018 and 2019, owner-occupied housing costs declined again when the effective interest rate German banks charged on housing loans with an initial fixed-interest period of more than 10 years dropped from 1.96 percent to
1.54 percent - a nose-dive by 22 percent. As a result, owner-occupied housing costs decreased by 9 percent over the same period of time. Interest rates continued to deteriorate last year, dropping to 1.22 percent or by 21 percent compared to 2019, and more or less matching the decrease of the prior year. Notwithstanding the anal- ogous interest rate drop, owner-occupied housing costs declined substantially faster than they had the year be- fore. The steep drop in owner-occupied housing costs is explained by the development of opportunity interest rates. Current yields on domestic bearer bonds experi- enced a drastic year-on-year drop last year, from 2.54 down to 1.75 percent, which implies a 31-percent de- cline. This means that homeownership has become more
profitable relative to this investment alternative. A decrease in opportunity interest will lower owner-occupied housing costs. The pandemic year of 2020 and the associated uncertainties for businesses are therefore reflected even in the way the economic benefits of home - ownership are trending.
1)Passing rents ( F+ B, 2021) refer to a dwelling of medium specification fit-out and state of repair. Rents on new leases (vdpResearch, 2021) and selling price are based on transaction data and refer either to initial selling prices or to resale prices of fully refurbished flats in good locations and with high specification fit-out.
With no population data for 2020 available yet, the population weightings of 2019 were adopted for 2020, too. To do the census reset of 2011 justice, retrograde calculation was used for 2010 as defined by the BBSR Federal Institute for Research on Building, Urban Affairs and Spatial Development (2018).
Source: German Economic Institute (IW)
2.3 Findings for the "Big 7" Cities
Owner-occupied housing costs also registered a one- year drop in Germany's seven largest cities, the so-called "Big 7." Due to their large populations, they strongly influence findings on the national level anyway. When calculating owner-occupied housing costs, it is assumed that the interest rate level of mortgage loans is identical to that of alternative investments. Whenever the owner -occupied housing costs change at a faster or slower pace in one district than in another between two periods, it is prompted by changes in the relationship of rents to prices. Accordingly, the cross-sectional comparison of a given year always also measures the ratio of prices to rents.
Among the seven largest German cities, the cost advantage of owner occupancy in 2020 was lowest by far in Berlin at 41 percent. While this matches the picture of previous years, it was bolstered last year by Berlin's rent cap, which caused average new-tenancy rents, in our case for fully refurbished flats, to linger on the prior-year level whereas condominium prices kept on climbing. But even in Berlin, the owner-occupied housing costs declined last year, for the above reasons. Among the "Big 7," the advantage of homeownership is greatest in Cologne and Düsseldorf with 65 and 64 percent, respectively.
Survey compiled for ACCENTRO Real Estate AG
Housing Cost Report 2021
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