ERES 2013 03-06.07.2013, Vienna (Austria) Elena Zanlorenzi Ilona Schaeffler Research & Development

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?


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


Source: REAG work-out on OECD data

Occupation rate


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.


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


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)


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)


-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



Investment in 1992: 254.000 € (2.990 €/sqm), 10% capital loss of the property in 20 years



Property tax: ca. 500 €/year

Rental agreement in 1992: 750 €/month, 10% decrease in 20 years



Tax deduction: 0 €



Price development

Rental development

Inflation


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)


-400.000

-300.000

-200.000

-100.000

0

100.000

200.000

300.000

€



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



Investment in 1992: 152.000 € (1.320 €/sqm), 68% capital gain of the property in 20 years





Registration fee: ca. 210



Tax deduction: ca. 980 € (average, staggered in 20 years)



Price development

Rental development

Inflation


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)


-200.000

-150.000

-100.000

-50.000

0

50.000

100.000

150.000

200.000

€



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


Occupation rate

COUNTRY STUDIES: SPAIN



Investment in 1992: 57.000 € (630 €/sqm), 184% capital gain of the property in 20 years







Tax deduction: ca. 500 €



Price development

Rental development

Inflation


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)


-100.000

-50.000

0

50.000

100.000

150.000

€


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



Investment in 1992: 64.000 £ (750 £/sqm), 151% capital gain of the property in 20 years

Transaction costs: ca. 1.800 £


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


Tax deduction: ca. 320 £ (average, staggered in 20 years)


COUNTRY STUDIES: UK

Price development

Rental development

Inflation


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

€



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


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


Italy

ACQ without mortgage 148%rental with 100% cash 90%ACQ with 50% mortgage 72%rental with 50% cash -194%

Spain


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.


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.


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!

for any other info, please contact [email protected]

No part of this presentation may be reproduced or trasmitted in any form or by any means,

whitout written permission of REAG (Real Estate Advisory Group S.p.A.). For any information

please contact:

[email protected]

ERES 2013 03-06.07.2013, Vienna (Austria) Elena Zanlorenzi Ilona Schaeffler Research & Development

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