eres 2013 03-06.07.2013, vienna (austria) elena zanlorenzi ilona schaeffler research &...
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ERES 201303-06.07.2013, Vienna (Austria)
Elena ZanlorenziIlona SchaefflerResearch & DevelopmentREAG Real Estate Advisory Group
To buy or to rent, that is the question:differences in homeownership according to economic and demographic parameters in Europe
INDEX
3. COUNTRY STUDIES
2. GENERAL ASPECTS: CULTURE OR FINANCE?
4. CONCLUSIONS
1. TO BUY OR TO RENT?
TO BUY OR TO RENT?
Does it make more sense to buy or to rent a home from an investment perspective? The answer, in an era of historically low interest rates and perpetually rising real estate values appears to be obvious: buy. But it could also be a better financial move from an investing standpoint to rent rather than to buy because people rarely consider some major costs of owning a home like operating costs and the impact of a mortgage. But what explains the differences in homeownership rates in Europe? A general trend is the increase in homeownership rates in most EU countries reflecting demographic and economic developments. This trend has also been greatly boosted by policies encouraging home ownership. Today homeownership ranges from over 90% in some Eastern European countries (Romania and Bulgaria) as well as in Southern European Countries like Italy and Spain, to 40% in Germany and Austria.
TO BUY OR TO RENT?
Understanding the variation in homeownership rates:
The concept of owner-occupation in housing varies around the world and there are potential impacts of social, political, legal, cultural and other variables in understanding homeownership as an international phenomenon.
However, tenure choice in a variety of countries seem remarkably similar with respect to explanatory variables. The overall strength and wealth of the macro-economy might be expected to affect ownership levels, but not necessarily the way one would expect: some of the highest ownership rates are in the poorer European countries, perhaps reflecting the higher cost of ownership in the wealthier economies.
Why do these differences in owner occupation levels grow up and why do they persist?
Despite large differences in tenure types, homeownership rates have increased significantly in many European countries over recent decades:
On the one hand there are economic and political factors that have an effect on the homeownership rate including income and wealth, the price of housing, interest rates and tax treatments: high levels of tax relief and subsidies on owner occupied housing clearly stimulate this choice of tenure.
On the other hand the general increase in owner-occupancy also reflects social and cultural developments, such as population ageing, tradition, home “sentiment”, mobility and urbanization.
Another important factor is supply (construction limits and land under national protection) and demand (population growth and population density) which varies also in each country.
GENERAL ASPECTS: CULTURE OR FINANCE?
GENERAL ASPECTS: CULTURE OR FINANCE?
Source: REAG work-out on OECD dataAbstract of countries relevant for the study
58%
43%
80%89%
66%
Average owner occupation rate in Europe: 64%
0% 20% 40% 60% 80% 100%
GermanyDenmark
NetherlandsFrance
SwedenUK
PortugalIreland
BelgiumGreece
ItalySpain
Hungary
GENERAL ASPECTS: CULTURE OR FINANCE?
Source: REAG work-out on OECD data
Occupation rate
GENERAL ASPECTS: CULTURE OR FINANCE?
How is the mortgage loan influencing the ownership rate?
In 2012, the total amount of outstanding mortgage lending was almost stable y-o-y in the euro area. However, the aggregated figure in the euro area showed some growth dynamics in mortgage lending at country level: poor macro-economic performance and worsening consumer confidence led to a y-o-y contraction in Italy and Spain while outstanding mortgage lending continued to grow in France, Germany and the UK.
The availability of housing finance is an issue that can help to increase access to owner occupation and the relaxation of down-payment constraints on mortgage loans has increased homeownership rates among credit-constrained, lower-income households.
GENERAL ASPECTS: CULTURE OR FINANCE?
Source: REAG work-out on European Mortgage Federation data5 countries of interest and the 2 extremesLatest data available: 2011
60.850
16.340 16.760
7.080
17.410
28.790
1.8000
10.000
20.000
30.000
40.000
50.000
60.000
70.000
Norway France Germany Italy Spain UK Ukraine
€
8.242.700
1.453.900 1.163.800 843.200 666.900 362.4004.500
0
1.000.000
2.000.000
3.000.000
4.000.000
5.000.000
6.000.000
7.000.000
8.000.000
9.000.000
USA UK Germany France Spain Italy Bulgaria
mill
ion
€
Per capita (over 18) mortgage debt
Total mortgage debt
GENERAL ASPECTS: CULTURE OR FINANCE?
Source: REAG work-out on European Mortgage Federation data5 countries of interest and the 2 extremesLatest data available: 2011
29,9
5,81,0 3,0
-1,9
0,8
-20,2-30
-20
-10
0
10
20
30
40
Russia France Germany Italy Spain UK Ukraine
%
2,6
42,4 45,3
22,9
62,1
83,7
106,2
0
20
40
60
80
100
120
Russia France Germany Italy Spain UK Netherlands
Residential debt to GDP ratio
Annual growth in mortgage debt
COUNTRY STUDIES: METODOLOGY
4 different cases:
1. Acquisition without mortgage
2. Rental agreement with cash available equal to the apartment value
3. Acquisition with 50% mortgage
4. Rental agreement with cash available equal to 50% of the apartment value
5 different European countries:
5. France
6. Germany
7. Italy
8. Spain
9. UK
Timeframe: 20 years (1992 – 2012)
COUNTRY STUDIES: METODOLOGY
Acquisition without mortgage:
Value of the property in 1992
Capital gain of the property
Transaction costs
Maintenance costs
Property tax
Saved cash from not paying rent and invested in a checking account
Acquisition with 50% mortgage:
Value of the property in 1992
Capital gain of the property
Transaction costs
Maintenance costs
Property tax
Mortgage loan (fixed for 20 years)
Mortgage tax deduction
Rental agreement with cash available equal to the apartment value:
Rental agreement of the property in 1992
Rental trends
Taxes/registration fees
Profit from cash invested in a checking account
Rental agreement with cash available equal to 50% of the apartment value:
Rental agreement of the property in 1992
Rental trends
Taxes/registration fees
Profit from cash invested in a checking account
COUNTRY STUDIES: FRANCE
Indicators considered:
Size: 85 sqm apartment
Investment in 1992: 99.000 € (1.160 €/sqm), 132% capital gain of the property in 20 years
Transaction costs: ca. 5.000 €
Maintenance costs: 0,5%
Property tax: ca. 900 €/year (owner) and ca. 950 €/year (tenant)
Rental agreement in 1992: 460 €/month, 63% increase in 20 years
Mortgage loan (fixed for 20 years): ca. 5.200 €/year
Mortgage interests: 4,9% (average in 20 years)
Tax deduction: ca. 970 € (average, staggered in 5 years)
Checking account interests: 3,6% (average in 20 years)
COUNTRY STUDIES: FRANCE
Price development
Rental development
Inflation
Checking account interests
Source: REAG work-out on data Insee, Banque de France
0
500
1.000
1.500
2.000
2.500
3.000
€/sq
m
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
€/sq
m/m
onth
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
COUNTRY STUDIES: FRANCE (BACKUP)
COUNTRY STUDIES: FRANCE
-100.000
-50.000
0
50.000
100.000
150.000
€
acquisition without mortgage rental agreement with cash available equal to the apartment value
acquisition with 50% mortgage rental agreement with cash available equal to 50% of the apartment value
58%
• ACQ without mortgage: amortization period after 9 years, after 2008 capital loss due to the crisis with recovery in 2010
• Rental with 100% cash: only little loss of capital, most in the crisis years, for 16 years superior to ACQ
• ACQ with 50% mortgage: quite good earnings until 2008; then loss and at the end in the red, amortization period after 14 years
• Rental with 50% cash: at the beginning in the black, at the end huge loss of capital
Occupation rate
COUNTRY STUDIES: GERMANY
Indicators considered:
Size: 85 sqm apartment
Investment in 1992: 254.000 € (2.990 €/sqm), 10% capital loss of the property in 20 years
Transaction costs: ca. 10.800 €
Maintenance costs: 0,5%
Property tax: ca. 500 €/year
Rental agreement in 1992: 750 €/month, 10% decrease in 20 years
Mortgage loan (fixed for 20 years): ca. 13.700 €/year
Mortgage interests: 5,8% (average in 20 years)
Tax deduction: 0 €
Checking account interests: 1,5% (average in 20 years)
COUNTRY STUDIES: GERMANY
Price development
Rental development
Inflation
Checking account interests
Source: REAG work-out on data Bulwien Gesa, Deutsche Bundesbank
0
500
1.000
1.500
2.000
2.500
3.000
3.500
€/sq
m
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
8,0
9,0
10,0
€/sq
m/m
onth
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
COUNTRY STUDIES: GERMANY (BACKUP)
COUNTRY STUDIES: GERMANY
-400.000
-300.000
-200.000
-100.000
0
100.000
200.000
300.000
€
acquisition without mortgage rental agreement with cash available equal to the apartment value
acquisition with 50% mortgage rental agreement with cash available equal to 50% of the apartment value
43%
• ACQ without mortgage: no amortization period at all
• Rental with 100% cash: almost no loss of capital, even in the crisis years, always superior to ACQ
• ACQ with 50% mortgage: worst case, huge loss of capital, no amortization period at all
• Rental with 50% cash: slight capital gain
Occupation rate
COUNTRY STUDIES: ITALY
Indicators considered:
Size: 115 sqm apartment
Investment in 1992: 152.000 € (1.320 €/sqm), 68% capital gain of the property in 20 years
Transaction costs: ca. 2.800 €
Maintenance costs: 0,5%
Property tax: ca. 150 €/year
Rental agreement in 1992: 720 €/month, 68% increase in 20 years
Registration fee: ca. 210
Mortgage loan (fixed for 20 years): ca. 8.900 €/year
Mortgage interests: 6,7% (average in 20 years)
Tax deduction: ca. 980 € (average, staggered in 20 years)
Checking account interests: 2,2% (average in 20 years)
COUNTRY STUDIES: ITALY
Price development
Rental development
Inflation
Checking account interests
Source: REAG work-out on data Nomisma, Agenzia del Territorio
0
500
1.000
1.500
2.000
2.500
3.000
€/sq
m
0,0
2,0
4,0
6,0
8,0
10,0
12,0
€/sq
m/m
onth
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
COUNTRY STUDIES: ITALY (BACKUP)
COUNTRY STUDIES: ITALY
-200.000
-150.000
-100.000
-50.000
0
50.000
100.000
150.000
200.000
€
acquisition without mortgage rental agreement with cash available equal to the apartment value
acquisition with 50% mortgage rental agreement with cash available equal to 50% of the apartment value
80%
• ACQ without mortgage: amortization period after 8 years, after 2008 capital loss due to the crisis
• Rental with 100% cash: loss of capital, but always in the black (only little earnings by means of checking account), for 13 years superior to ACQ
• ACQ with 50% mortgage: always loss of capital, after 2008 even more, no amortization at all
• Rental with 50% cash: at the beginning in the black, at the end huge loss of capital
Occupation rate
COUNTRY STUDIES: SPAIN
Indicators considered:
Size: 90 sqm apartment
Investment in 1992: 57.000 € (630 €/sqm), 184% capital gain of the property in 20 years
Transaction costs: ca. 4.500 €
Maintenance costs: 0,5%
Property tax: ca. 450 €/year
Rental agreement in 1992: 280 €/month, 106% increase in 20 years
Mortgage loan (fixed for 20 years): ca. 3.500 €/year
Mortgage interests: 6,0% (average in 20 years)
Tax deduction: ca. 500 €
Checking account interests: 4,1% (average in 20 years)
COUNTRY STUDIES: SPAIN
Price development
Rental development
Inflation
Checking account interests
Source: REAG work-out on data Reuters Ecowin, Institudo Nacional
0
500
1.000
1.500
2.000
2.500
€/sq
m
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
€/sq
m/m
onth
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
9,0%
10,0%
COUNTRY STUDIES: SPAIN (BACKUP)
COUNTRY STUDIES: SPAIN
-100.000
-50.000
0
50.000
100.000
150.000
€
acquisition without mortgage rental agreement with cash available equal to the apartment value
acquisition with 50% mortgage rental agreement with cash availableequal to 50% of the apartment value
89%
• ACQ without mortgage: amortization period after 4 years, after 2008 capital loss due to the crisis
• Rental with 100% cash: quite stable also in the crisis years, for 11 years superior to ACQ
• ACQ with 50% mortgage: amortization period after 10 years, after 2008 capital loss, amortization period after 9 years
• Rental with 50% cash: at the beginning in the black, at the end loss of capital
Occupation rate
COUNTRY STUDIES: UK
Indicators considered:
Size: 85 sqm apartment
Investment in 1992: 64.000 £ (750 £/sqm), 151% capital gain of the property in 20 years
Transaction costs: ca. 1.800 £
Maintenance costs: 0,5%
Property tax: ca. 1.700 £/year
Rental agreement in 1992: 380 £/month, 257% increase in 20 years
Mortgage loan (fixed for 20 years): ca. 3.800 £/year
Mortgage interests: 6,0% (average in 20 years)
Tax deduction: ca. 320 £ (average, staggered in 20 years)
Checking account interests: 4,6% (average in 20 years)
COUNTRY STUDIES: UK
Price development
Rental development
Inflation
Checking account interests
Source: REAG work-out on data Halifax, Bank of England
0
50.000
100.000
150.000
200.000
250.000
£/sq
m
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
£/sq
m/m
onth
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3,5%
4,0%
4,5%
5,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
9,0%
10,0%
COUNTRY STUDIES: UK (BACKUP)
COUNTRY STUDIES: UK
-150.000
-100.000
-50.000
0
50.000
100.000
150.000
€
acquisition without mortgage rental agreement with cash available equal to the apartment value
acquisition with 50% mortgage rental agreement with cash available equal to 50% of the apartment value
66%
• ACQ without mortgage: amortization period after 7 years, after 2007 capital loss due to the crisis with stabilization in 2009
• Rental with 100% cash: quite stable with decrease of the capital after 2009, for 13 years superior to ACQ
• ACQ with 50% mortgage: amortization period after 11 years; after 2007 huge loss of capital, amortization period after 11 years
• Rental with 50% cash: at the beginning in the black, at the end huge loss of capital
Occupation rate
CONCLUSIONS: DIRECT COMPARISON
Country Capital gain/loss of the property in 20 years
One-time transaction
costs
Average annual
property tax
Rental trend in 20 years
Annual mortgage
loan
Fixed mortgage interests
(1992)
Average annual tax deduction
Average checking account interests
France 132% 5.000 € 900 € 63% 5.200 € 8,6% 970 € (only 5 years)
3,6%
Germany -10% 10.800 € 500 € -10% 13.700 € 9,0% 0 € 1,5%
Italy 68% 2.800 € 150 € 68% 8.900 € 10,3% 980 € 2,2%
Spain 184% 4.500 € 450 € 106% 3.500 € 10,5% 500 € 4,1%
UK 151% 1.800 £ (2.200 €)
1.700 £ (2.300 €)
257% 3.800 £ (5.200 €)
10,3% 320 £ (440 €)
4,6%
Best case
Worst case
CONCLUSIONS: DIRECT COMPARISON
Occupation rateTotal capital gain/loss in 20 years
58%
43%
80%
89%
66%Best case
Worst case
ACQ without mortgage 100%rental with 100% cash 59%ACQ with 50% mortgage -15%rental with 50% cash -169%
France
ACQ without mortgage -24%rental with 100% cash 87%ACQ with 50% mortgage -268%rental with 50% cash 160%
Germany
ACQ without mortgage 59%rental with 100% cash 9%ACQ with 50% mortgage -109%rental with 50% cash -208%
Italy
ACQ without mortgage 148%rental with 100% cash 90%ACQ with 50% mortgage 72%rental with 50% cash -194%
Spain
ACQ without mortgage 95%rental with 100% cash 77%ACQ with 50% mortgage -81%rental with 50% cash -423%
UK
CONCLUSIONS: ECONOMIC AND DEMOGRAPHIC PARAMETERS
Italy and Spain
In Southern Europe there is a strong tradition of the family being very involved in the accommodation choices of their children who tend to live with their parents much longer and thus enter the property market relatively late in life when the parents are in a better position to help them financially.
Typically in Southern Europe people will buy, inherit or recieve a gift of a property and will stay for a long time. In contrary to other homeowners who are keen to upgrade their main residence if they come into money they are also likely to invest in a second home. These countries are reflecting cultural values and moreover there are also discriminatory policies towards private rental housing.
CONCLUSIONS: ECONOMIC AND DEMOGRAPHIC PARAMETERS
France and UK
The supply of rented accommodation is small and this will push up its cost: increasing supply of rental property is resulting from the rapid increase in house prices and has led to a fall in the overall proportion of owner occupation in recent years. Even though prices are usually higher than in Southern Europe, housing finance systems are more developed helping people to buy, even without the support from their family.
These countries are highly densely populated and demand outstrips supply in the areas where the jobs are; new supply is still limited by planning restrictions which pushes prices up and makes it too expensive for many to buy, even if that is their tenure preference.
CONCLUSIONS: ECONOMIC AND DEMOGRAPHIC PARAMETERS
Germany
It is a wealthy economy but it has the lowest proportion in owner occupation in Europe: very high construction standards mean that building a house is very expensive. In addition taxation policy has favoured investment in rental housing, which has led to the strange situation of owning a house but choosing to rent it out and to rent a different one to live in.
Rental market regulations are stricter and tenant protection is higher than in most other European countries which explains a lower probability of homeownership.
Whether renting is better than buying depends on many factors, particularly how fast prices and rents rise and how long people will stay in their home.
It's usually better to buy than to rent, but not in any case, and usually not right away. It usually takes at least a few years for buying to become a better deal than renting. That's because there are some big up-front costs when buying, and the monthly payments from buying are generally higher. However, those payments are building equity in one’s home – people are "keeping" some of what they're paying. Also, while people are making their payments, their home generally appreciates in value. After some number of years the equity paid into their home plus the appreciation will usually overcome the extra money they had to pay to get into the home.
CONCLUSIONS
Thank you very much for your attention!
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