Is it better to rent or to buy real estate in Austria?
Calculating potential investment returns in the Austrian property and stock markets
*Disclaimer: this article only represents the personal opinion of the writer and should not be treated as financial advice.
In the last article, we analyzed the potential of a property bubble in the Austrian capital Vienna and the possibility of it deflating. By doing further research, we are going to examine purely from an investment point of view whether it is better to rent or buy property in the Austrian capital Vienna.
The rent and buy prices for the following examples are based on the information from the website immopreise.at [1], a platform that collects data on property prices in Austria.
Note: the operating costs (which depend on the size, energy efficiency, etc. are fixed costs that need to be paid to the local council. These costs include tax, trash-collecting fee, and water, but do not include electricity, internet, TV license, etc.) for the following two examples are not included in our calculations. That is because it does not matter if you buy or rent — they are the same for homeowner and tenant.
Buying an apartment
Let’s start with the example of buying an apartment. The assumption is that a majority of people buy property by making a down payment of a certain percentage of the agreed price and then pay the rest by taking a mortgage from a bank.
For easy calculation, we will look at a 100 m2 apartment with a price of 5000 € per square meter. The total price for the apartment is 500k €.
Initial costs for the buyer include: [2]
Commission paid to the agency: 3% of the property price plus 20% VAT: 500k € × 3% × 1.2 = 18k €
Real estate transfer tax (German: Grunderwerbssteuer): 3.5% of the property price: 500k € × 3.5% = 17.5k €
Land registration fee: 1.1% of the property price: 500k € × 1.1% = 5.5k €
Monthly expenses for the buyer:
Monthly mortgage payback: Let’s say the buyer pays a 30% down payment and takes a mortgage of 350k from the bank. The total repayment time is typically 25 years. For the next step, let’s use the average monthly payment calculated by the two websites durchblicker.at [3] and finanz.at [4], as of the time this article was written, the monthly payments are as follows:
Based on their data the average monthly payment is:
(1 172.5 € + 1 222 € + 1 262 €)/3 = 1 218.83€
Maintenance cost: These costs cover everything needed in order to keep the property in a good condition such as changing an old tap, repair the heating or a crack on the floor. Usually, homeowners are more willing to pay these costs. We will set the monthly maintenance cost at 100€.
Renting an apartment
Now let’s look at renting the same apartment. With a size of 100 m2 and a rent of 13€ per square meter, the rent would be 1.300€ a month. Based on information from willhaben.at, operating costs normally range from around 100 euros to more than 300 euros. For this example, we will use an average of 230 euros. Thus, net rent is 1300–230 = 1070 euros. In addition, the tenant will need to pay the landlord a deposit, which is normally 3 months’ rent which in our case amount to 3.900€. This deposit will be returned to the tenant when he/she moves out minus the costs for wear and tear.
We assume that the landlord increased 1% of the rent every year for the 25 years.
Initial costs for the tenant:
Rent contract fee: [5] The fee is calculated as 1% of the total rent for the whole rent period payable. It can be paid by the landlord or the tenant. A typical rent contract in Austria normally lasts for 5 years, some can be permanent. In our example, we assume the tenant pays the fee and the contract is permanent. Contract fee = 1300€ × 12 months × 1% = 156€
Commission for the agency: normally 2 months’ rent plus 20% VAT: 1300€ × 2 × 1.2 = 3120€
In the last article, we made an analysis of the residential property price index (RPPI) in Austria. Over the last 19 years, the property market experienced a bull run and the price increased by around 250%. Accordingly, investors who bought a property around the year 2000 made a nice profit: 500k € × 250% — 586.649k € = 663.3k € (The RPPI data uses the year 2000 as the basis.) For this example, the buyer only needed 19 years to make a nice profit. (The actual profit would be less because back then the interest rate was higher, which would increase the monthly payments.)
By contrast, renting the same apartment for a period of 25 years would have cost 374.669k €.
The investment return (in the stock market) lost on the deposit of 3900€ minus capital gain tax:
(3.9k × (2922/1134) -3.9k) ×(1–27.5%)= 4.458k€
As a result, the total cost for renting the apartment would be
374.669k + 4.458k = 379.127k€
This is less than what tenant would have spent if they had bought the apartment, which means they would have saved 586.649k -379.127k = 207.522k€
Investing in the ATX
But since the tenant did not spend the initial capital of 150k€ as part of the down payment, then could invest it. Now let’s look at the Austrian Traded Index (ATX). If the money was invested in the year 2000 and taken out of the ATX today, it would have more than doubled: 150k € × (2922/1134) = 386.508k€
According to the Austrian law, investment on investment capital gain is eligible for 27.5% tax
Thus, the profit after tax= 150k + (395.76k-150k)×(1–27.5%) = 321.468k€
Adding the saving in cost, the total would be:
321.468k + 17.646k = 339.114 €
To summarize in a table:
Note that for the above examples the conclusion is that investors would have made a nice profit by either buying and selling a property or by renting the same property and using the remaining money to invest it in the Austrian stock market 19–20 years ago. There is a flaw with these calculations, though. For this example, we used current data and interest rates. In reality, buyers would probably have made a smaller return on their property due to higher interest rates in the past 20 years.
But how does the situation change when it comes to buying or renting (and investing in the stock markets) in 2019 or 2020? There are a number of reasons why both options pose risks: As discussed above, both the Austrian property and stock markets have had a nice run for the last two decades. It is unlikely, that this trend will continue. Central banks around the world are introducing negative interest rates and quantitative easing. At the same time, an increasing number of companies amassed too much debt and are going bankrupt or having server financial problems, examples include Thomas Cook, Pizza Express, Jet Airways, etc.
In the event of a crisis, a deflationary shock would occur, sending stock markets and property prices to the bottom. If central banks try to counter the crisis by printing more money, housing and stock prices would rise again sharply due to inflation. This means that both buyers of properties or tenants who plan to invest money into the stock markets either must catch the right moment to buy/invest when deflation occurs or should wait on the sidelines.
As a consequence, it would be better to invest money in some assets which would hedge against a crash in the stock and property markets, as well as against high inflation. Two such assets come to mind: Gold and Bitcoin.
Bitcoin was the best performing asset for the last 10 years. Introduced in 2009, the price of one Bitcoin increased from 0 to 8000$ today with an all-time-high price of almost 20 000$ at the end of 2017. One counter-argument is that because Bitcoin was invented after the 2008 crisis, it has not been through any market downturn. Still, it is seen by many as a good hedge against the downfall of centralized financial systems. We have mentioned this in one of the previous articles.
As mentioned at the beginning, this article examined whether it’s better to buy or rent an apartment from a pure investment point of view.
Of course, one can always argue that owning your own property is better than renting. There are numerous reasons for that, such as that owner have more freedom to implement whatever changes they like, such as painting the wall in a different color or installing some fixtures which are difficult to remove again. The calculations done in this article provide a perspective on how to minimize losses during an upcoming crisis. But in the end, the satisfaction and security of owning your own property are priceless.
This article is inspired by videos from Dr. Markus Krall [7] [8] and Mr. Gerd Kommer [9].
References:
[1] https://www.immopreise.at/Wien/Wohnung/Eigentum
[2] https://www.arbeiterkammer.at/beratung/konsument/bauenundwohnen/eigentum/Wohnungskauf.html
[3] https://durchblicker.at/kreditzinsen
[4] https://www.finanz.at/kredit/#Anbieter
[5] https://www.immobilienscout24.at/eigentuemerlexikon/immobilien.html
[6] https://www.wko.at/service/steuern/Die-Besteuerung-von-Wertpapieren.html
[7] https://www.youtube.com/watch?v=dku7LfketuQ
