Many young professionals face the decision whether they should buy or keep renting a flat. With housing prices shooting up in the last 3-5 years across most of the developed world (mostly as a consequence of central banks’ frenetic money printing) many people were forced out of the market and have no alternative but to keep renting.
I live in Amsterdam, so let’s pick this city as an example. Housing is per definition very heterogeneous so no one really knows how much they’re going up or down as an aggregate. However I’ll use some common sense and my experience to estimate the evolution of prices in the last 10 years for an average 2 bedroom flat.
2005: 200,000 EUR
2008: 220,000 EUR
2010: 195,000 EUR
2015: 240,000 EUR
Official data suggests prices are still 5% below their peak in 2008, but on reality land the prices are much different. For example I bought a house last month for 275k which was sold in Jan-2009 for 219k. That’s a 26% increase in 6 years! And everyone I speak with (brokers, investors, flippers) share the same views. The money printed by central banks, the ultra-low borrowing rates and an outdated wealth tax (which still assumes 4% return on your assets) has led to a bubbly housing market across most of Europe’s main cities. That’s why many millennials are renting and sharing, rather than owning stuff.
But are house prices really that more expensive?
Let’s look at mortgage interest rates across the Netherlands. If we look at interest rates now versus where they were 10 years ago, they more than halved. That means you’ll pay much less as a proportion of your income than before. Here’s data from Hypotheekshop (large mortgage broker in Netherlands):
In 2008 for example you’d pay 5.5% for a 10-year fixed rate (most common mortgage type in the Netherlands). Going back to the above example, the 2008 average house price was 220,000 EUR, which means the average household was spending 12,100 EUR per year on interest. Assuming the average household family earns 40k that represents an effort rate of 30.25% (mortgage costs / income). If you take a mortgage today for that same house it will cost you 240,000 but the interest rate is 2.5%, which means the average household is now spending 6,000 EUR per year on interest, or 15% of their total income (assuming income did not change either):
Looking at the below blue columns, it’s evident that total house costs (mortgage interest costs over 30 years + initial price paid) are much lower today than they were in 2008. The same goes for the amount of money an average household spends to service its mortgage debt (orange line):
If you look at total house cost (total mortgage payments + house price), in 2008 you had to pay 583,000 EUR over 30 years. If you take the same mortgage today, you pay “only” 420,000 EUR. That’s a difference of 163,000 EUR over 30 years, which in today’s value represents 77,709 EUR (discounting at 2.5%). So the “fair” value for the average flat according to this ratio is 297,709 EUR, 24% above the current values. This obviously assumes rates in 10 years will be around same levels that today, so there’s a refinancing risk here you need to account for. But it’s probably reasonable to assume rates won’t go higher (that’s a whole different discussion but I don’t believe central banks will allow rates to go up given the over-indebtedness of Western’s societies).
If you look at the more simplistic DTI ratio (if it were to remain 30%), the “fair” value is 484,000 EUR (100% above current levels). However that does not take into account that interest-only mortgages are no longer available, so you’ll need to pay to the bank some principal every month. You’d also need to take into account time value of money. You could also argue about the lower tax deductibility in the coming years (going down from 52% in 2013 to 38% in 2041), but that affects mostly the upper class (those paying 52% income taxes), not so much the average family. Also, tax deductibility & interest-only effects are partially offset by the rising incomes (I assumed they stood flat at 40k since 2008). In any case the point of this article is not to get too technical – only to illustrate that house prices might not be as pricey as many think.
Since 2010 houses prices are up 30% in Germany, 20% in UK, 20% in US, 20% in Switzerland and around flat in Netherlands. But at the end of the day it doesn’t matter so much what they cost, but more importantly how much you pay every month vis-à-vis your income, and also how much you’ll end up paying to the bank over 30 years. And that has dropped significantly since 2008, proportionally much more than the rises in prices. At which point do I think the bubble will burst? Well, depends on the country but probably there’s another 25-30% to go in the Netherlands!
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