Déjà vu on the real estate market: Buying once again more expensive than renting

Status quo in recent years: Homeownership was less expensive than renting

For many years, the total cost for residential property when taking out or renewing a mortgage was lower than the cost of renting a comparable apartment. Now, however, the page has turned: While homeowners still enjoyed an average ownership discount of 15.5% at the beginning of 2021, the first quarter of 2022 saw them paying a 3.1% premium for residential property.

This change in trend is attributable to the steep rise in interest rates for Fix mortgages. From the beginning of 2021 to the end of March 2022, the five-year Fix mortgage climbed from 1.1% to nearly 2%. Together with considerable price increases, this has turned the discount for ownership into an ownership premium in the blink of an eye.

Ownership premium for residential property likely to climb further

Both the first and second quarters have seen the interest rates for Fix mortgages trend upwards. Following the dramatic increase in the first half of 2022, rates are expected to rise only mildly over the next 12 months. As in the past, this development will be accompanied by upward and downward fluctuations. As such, ownership discounts are unlikely to return anytime soon, even if mortgage interest rates remain at a manageable level overall.

Residential property also subject to ownership premiums before 2008

The current ownership premium is nothing new: In most cases, homeowners also had to pay a premium prior to 2008. Between 1993 and 2008, this premium averaged 29%. However, such ownership premiums can be justified with the greater possibilities for individualization and the associated higher standard of construction of owner-occupied properties. For many owners, the premium is also worthwhile for another reason: the freedom of living within your own four walls.

Real estate market: Excess demand persists despite fewer prospective buyers

For first-time buyers, buying a home has again become more expensive than renting overall. In terms of calculating affordability, however, which typically involves interest rates of 4.5% or 5%, this changes nothing for those interested in buying. As such, the number of potential homeowners will not decrease as a result of the ownership premium, but the effective increase in financial outlays will most likely dampen demand for residential property significantly. Since new construction activity is declining at the same time, however, and only a few properties are available on the market, excess demand and further increases in property prices can still be expected. Nevertheless, future growth will likely turn out to be much lower than what we have seen in the recent past.

Lower costs for residential property with existing Fix mortgages

The good news first: If a buyer opts for a SARON mortgage, an ownership discount will continue to apply for the time being. The same also applies for many existing homeowners since the majority of them have taken out Fix mortgages and will still benefit from low financial outlays for their residential property for some time yet.

The not-so-good news: Existing homeowners will have to keep in mind that they, too, will face higher mortgage interest costs after their Fix mortgages end, and the interest rates for SARON mortgages will most likely rise over the coming quarters as well. As such, reserves should be set aside now for the higher mortgage interest rates in the future.