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The real estate market of 20 years ago triggers nostalgia and envy in many people today – when you compare the prices with today. But was owning a home really more affordable back then?
Anyone who talks about real estate quickly gets lost in nostalgia: Everything used to be better – and above all cheaper, as it is often said. Back then, parents and grandparents could have afforded a house in a central location for 250,000 euros. Today you can’t even get an apartment for that.
In fact, real estate prices in Germany have almost doubled since 2010 alone. In Frankfurt, a 100 square meter condominium cost just over 300,000 euros in 2009. Ten years later it was already more than 600,000 euros. Absolute prices rose sharply, especially in the 2010s.
Interest rates were higher back then
In order to assess whether it is really more difficult to afford a property today, the purchase price must be put into perspective. The interest rate level cannot be ignored. This plays an extremely important role when it comes to financing because very few people manage to finance the purchase of their house or condominium without the help of the bank.
According to FMH Finanzberatung, buyers currently pay an average of more than three percent interest for ten-year building financing. At the end of 2021 they were still at one percent. This means that it is currently significantly more expensive to finance a property than it was three years ago.
But what were interest rates like before the long period of low interest rates? In the 1990s, property buyers still had to pay almost nine percent mortgage interest to the bank. That is almost three times the current level. In the 2000s, interest rates fell to 6.5 percent. And in 2010 they were four percent, which is roughly the level at which interest rates are currently moving again.
Low interest rate phase unusual
The impression is deceptive that everything used to be better, says real estate professor Günter Vornholz in the podcast “Gold & Asche: Project Hauskauf”. ARD financial editorial team. Looking at the long term, it used to be much more difficult and less affordable to buy a house.
This has changed in the last decade due to the low interest rates of the European Central Bank (ECB). “Many people had hopes of being able to afford an apartment or a house with mortgage interest rates of one percent. And after the rapid rise in interest rates, the general conditions have changed completely.”
While a normal earner could have bought a house three years ago, this is no longer possible today given the relatively high interest rates, says Vornholz. The low interest rates created a situation in which two thirds of all households could suddenly afford home ownership. “Today, as in the past, it is common practice that it is those with above-average income who can afford home ownership.”
Podcast “Gold & Ash: House Purchase 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. The individual episodes You will find here.
Episode 1: Is it worth buying a house? (21st of February)
Episode 2: The Right Time to Buy a Home (February 21)
Episode 3: How much house can I afford? (February 28)
Episode 4: What do I have to pay attention to when getting a loan? (6th March)
Episode 5: How the state provides financial support for buying a house (March 13)
Episode 6: Everything about energy renovation (March 20)
Episode 7: Was everything better before? (27th of March)
It is today more affordable as previously?
The purchase prices used to be lower, but the financing costs were not. How affordable a property is today depends on the interest rate, the price of the property and also your income. The German Economic Institute (IW) used data from the Organization for Economic Cooperation and Development – OECD for short – and created an affordability index for Germany from 1980.
The result will probably come as a surprise to many: it is much more affordable to buy a property today than it was in the 1980s. Although home prices rose sharply in the 2010s, this was more than compensated for by the reduction in interest rates in the market.
It was actually most “unaffordable” in 1981. It was relatively cheapest in 2016. Since then it has become a little more expensive, but it is currently still a long way from the level of the 1980s and 1990s. Today it is about as expensive to purchase a property as it was in the mid-2000s.
Quality of living on a different level
And compared to before, it is significantly more expensive to build today, but the quality of living has increased over the years. For example, the consumption of living space has increased by 37 percent in the last 30 years. And the quality of the real estate is now on a different level.
“Everything is becoming increasingly higher quality and more expensive. Not just because the state partially mandates it, but because we want it to be that way,” explains financial expert Gerd Kommer in the podcast. And of course this leads to the costs of property and rent rising. “If I take these quality and area effects out of the equation, the numbers no longer look so dramatic.”
Avoiding consumption and work ethic
So everything isn’t so crazy today? Actress Whoopi Goldberg recently mocked the work ethic of Millennials and Gen Z, saying, “Sorry, but if you only want to work four hours, it’s going to be harder for you to get a house.” So are avocado toast, going on vacation three times a year and frequent restaurant visits getting in the way of owning a property?
According to a survey, young people in particular have a particularly strong desire to have their own four walls. Three quarters of 18 to 29 year olds and two thirds of 30 to 39 year olds would like to own their own home. And they would be prepared to forego consumption in order to do so. Almost 30 percent said they would forgo a vacation in order to buy the property, and 17 percent wanted to cook at home more often.
What has changed compared to before?
The fact that it has become more difficult to afford a property today is not entirely unfounded. One point is: In recent years it has not been possible to save capital conservatively at the bank due to low interest rates. Of course, this does not apply to returns that could be achieved on the stock market.
But accumulating capital through share savings is still not the norm in Germany. Even though this is slowly changing, too few Germans still venture into the stock market. Instead, they save more conservatively, which meant that for a long time it was hardly possible to save enough money for a property.
According to IW expert Michael Voigtländer, the topic of savings was not quite as relevant in the past. “That means you had the amount you needed to own your home more quickly.” At least there is currently interest again on the savings account.
Higher capital requirements necessary
Another big difference compared to before is the capital requirement, which has risen sharply during the real estate boom of recent years. Anyone who today has to pay 30 percent of the purchase price of a property worth 400,000 euros, including additional costs, theoretically needs 120,000 euros.
Even high earners in their 30s can hardly manage this. That’s why many households only manage to buy a property with the help of their family or an inheritance. So it’s no longer about the monthly salary, but about what funds are available before you buy the property.
Real estate economist Konstantin Kholodilin from the German Institute for Economic Research (DIW) puts it this way: “Wealth inequality is much, much greater than income inequality. This means that everything that our ancestors have accumulated contributes significantly to how we can buy real estate. ” When buying real estate, this means that the importance of income decreases, while the assets you already have become more and more relevant.
Additional purchasing costs and regulation
What has also changed in recent decades to the detriment of the younger generation are the additional purchase costs – such as the property transfer tax, which makes up a large part of the additional purchase costs. In some federal states they now amount to 6.5 percent of the purchase price. In the mid-1980s it was just two percent.
The increasing complexity and more regulation, for example by building authorities or the legislature, ensure that construction is becoming more and more expensive on the one hand and, on the other hand, it is becoming less and less possible to make it cheaper through in-house work.
In the past, you could compensate for a lot by doing your own work, says Voigtländer. “It’s much more difficult today.” This has, among other things, to do with the more complex construction requirements. “That also certainly makes it more difficult to provide your own work these days.”