Real estate as retirement planning: is buying a house worth it?


analysis

As of: February 21, 2024, 8:17 a.m.

In Germany, the majority still want to live in their own home. What is behind this wish? And is it even worth buying over renting?

In no other EU country are there as few homeowners as in Germany: less than half of Germans lived at home in 2022. The desire is completely different: according to surveys, almost three quarters of all tenants need their own accommodation.

There are financial reasons for this, but also motivations such as security and creative freedom. In a survey conducted by the German Economic Institute, the Allensbach Institute for Demoscopy and Consult GmbH on behalf of Sparda Banks, a majority of the more than 1,000 respondents are of the opinion that purchasing real estate in it's worth it.

Ensuring the standard of living of the elderly

The topic of retirement provision, in particular, plays an important role for many people when considering purchasing real estate. In order to maintain the standard of living acquired before retirement, even in retirement, private pension provision is becoming increasingly important alongside professional and legal pension provision.

Because the legal pension is significantly lower than the final salary. Pension levels in Germany currently stand at around 50 percent of average income. Anyone who ensures private retirement provision can do so through funds, ETFs or the Riester annuity – or even through real estate. The idea is that you can ultimately live rent-free in your own four walls during your old age.

For many tenants, the question arises whether the rent money should be used to repay a mortgage. True to the motto: “I would rather pay back 1,000 euros every month for a loan than transfer 1,000 euros every month to my landlord – and end up with nothing.” But is this hypothesis really true?

A 2022 study by the research institute Empirica looked into the question of who is actually better off in retirement: renters or homeowners. The results of the survey carried out among 50 to 59 year olds with a net income of between 1,700 and 2,300 euros are quite clear. Homeowners had more than five times the net worth of renters. They had net assets of 36,000 euros, while the owners had 190,000 euros.

Additionally, the owners were even ahead when it came to financial assets, meaning what was in the account and not in the property. Owners in the same income bracket had financial assets of just under 52,000 euros, tenants only more than 31,000 euros.

Real estate triggers “positives compulsory savings contract” out of

Although these figures should be viewed with caution, as they only reflect cases in which the property purchase was successful and exclude many other factors: one of the reasons why homeowners are often wealthier in older age is that paying off a home loan requires a lot of discipline. . The real estate loan is a form of positive compulsory savings contract.

The fear that the bank will repossess the newly built or purchased house is a great motivation to “save” enough to repay the loan. Homeowners must pay their loan installments to the bank every month. In return, homeowners are willing to make sacrifices and pay more attention to price when it comes to their spending. And this can be seen in the wealth difference between homeowners and renters.

“Ultimately, I have to be aware – if my name is not Krösus – that the first ten years will probably be difficult and that I will have to refrain from consuming,” says financial book author Gerd Kommer in the podcast “Gold & Asche: Hauskauf Project”. ARD financial editorial team. “That I can’t go on vacation to the Maldives, that I can only afford a small car, that I just need to save money.” This is especially true during the first ten years, as household income is often lower during this time.

Gold and ashes

Podcast “Gold & Ash: Home Buying Project”

In the first season of “Gold & Asche”, the ARD financial editorial team The most important things when buying a house are examined step by step in seven episodes – with background information and expert knowledge. You can hear it in the ARD Audio Library and wherever podcasts are available. You can find the individual episodes here.

Episode 1: Is it worth buying a house? (the 21st of February)
Episode 2: The right time to buy a house (February 21)
Episode 3: How Much House Can I Afford? (February 28)
Episode 4: What should I pay attention to when getting a loan? (March 6)
Episode 5: How the State provides financial support for the purchase of a house (March 13)
Episode 6: All about energy renovation (March 20)
Episode 7: Was everything better before? (March 27)

“Lifestyle inflation” phenomenon

Tenants are also required to pay their rent on time each month. However, it is generally not necessary to go to financial extremes to become debt free as quickly as possible, until retirement at the latest. This also includes owners making special refunds if anything is left.

In comparison, a tenant can voluntarily invest their disposable income in the capital market in addition to rent and necessities. But very few people are so disciplined without constraint.

This phenomenon is also known as “lifestyle inflation” or “lifestyle drift”: you earn more and could theoretically save money or invest it in the capital market, but instead of that, you simply spend more. The tenant can afford this “additional” consumption, but it is also to the detriment of his assets.

The rent is not comparable to the monthly loan payment

Owners can therefore, on average, have more assets than older tenants. However, the comparison between the monthly rent and the amount of the loan to the bank is incorrect: it assumes that the tenant's monthly charge is the same as that of an owner. In order to achieve a correct comparison between tenant and buyer, all costs incurred by the landlord must be included in the calculation.

On the one hand, tenants pay rent that is not used to build their assets, but on the other hand, they bear no risk, as Niels Nauhauser from the Baden-Württemberg Consumer Center said. ARD financial editorial team explain. If something breaks, needs to be repaired or maintained, the tenant doesn't pay. The owner, on the other hand, must calculate in the long term “that the entire residential property will be – I would say casually – destroyed in 50 years”, explains Nauhauser.

Maintenance costs depending on condition or size

In order to maintain the value of your property, you must provide, in addition to the monthly loan payment, funds for renovation and maintenance costs. Consumer rights activist Nauhauser expects around two percent of the building's value per year. For a property worth 400,000 euros, this could amount to a good 8,000 euros per year – or around 670 euros per month, which would also have to be put aside. Other estimates are based on values ​​such as square footage or age.

The rent cannot therefore be directly compared to the maturity of the loan; most likely with interest payments, including acquisition and maintenance charges and all other ongoing charges. Ultimately, the interest is not paid to the retirement pension, but rather to the bank. And maintenance costs, which are not used to increase the value but rather to maintain the property, fall, for example, on traders or insurance companies.

A good retirement?

A property in principle constitutes good retirement provision if the purchase conditions – such as sufficient capital – are met, explains Kommer. “It’s a good form of retirement planning, but it doesn’t have to be the best and it’s certainly not the only good one.”

Niels Nauhauser from the consumer advice center also points out that real estate can be a profitable precaution, but it is not obligatory. Looking back, many asset classes are more profitable than real estate.

Protection against eviction

In addition to retirement provision, security is also an important reason for many people to own their own property. Landlords don't have to worry about whether their apartment will be evicted for personal use. The German Tenants' Association estimates – due to lack of official figures – the number of terminations for personal use of rental apartments at just under 80,000 per year.

But that’s a small number considering there are more than 40 million apartments in Germany. The probability that the apartment will be canceled is therefore quite low. But of course, the risk is permanent.

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