Buying a house is wasting money

At some time in the 30’s most of us are thinking about buying a house or at least an apartment as we are all wishing to have our own home some time. But from the financial perspective, does buying instead of renting really makes sense?

In the region where I live buying a house with a size of about 120m²  would cost about 400 000 EUR. Thanks to the low interest rates this is already insanely expensive. Additional costs are the following fees:

  • fees for the land register of 3.5% of the buying price: 14 000 EUR
  • fees for the entry in the land register of 1.1% of the buying price: 4 400 EUR
  • fees for real estate agent of around 3.0%: 14 280 EUR
  • other fees and additional costs calculated with: 10 000 EUR
  • furnishing etc. calculated with: 40 000 EUR

So in total the additional costs will be 82 680 EUR and the costs for house worth of 400 000 EUR will be 482 680 EUR. Now assuming having a capital of 150 000 EUR, which is not that bad, would mean that you should take out a loan of 332 680 EUR.

The problem is when taking out a loan there will be additional fees like:

  • service fees
  • additional fees for the land register etc.

All in all you need to calculate with additional fees of around 12 000 EUR just for taking out a loan.

How much do you have to pay back?

Assuming an interest rate of 2.8% and a monthly rate of 1 366.96 EUR and a credit period of 30 years it would resulzt that in total you pay 492 107 EUR over the 30 years.

That does mean that you are paying 642 107 EUR for a house, which is worth 400 000 EUR. That is a difference of more than 240 000 EUR and that does not include any repair costs. From the financial side this does not look like a real good investment. Of course there is the possibility in an increase of the value of the house. But to keep a house in a good shape you will have as well a lot of repair costs etc.

When I compare it to renting, a reasonable rent, without additional costs like water, gas etc., would be on average 1 500 EUR with a yearly increase of 2% over the 30 years, which will make it a total rent payment of around 730 000 EUR. This is a lot more but you do not have any repair costs and you still have your start capital of 150 000 EUR.

Investing the start capital instead of buying

The average compound rate of the S&P 500 is about 9% per year. If I invest the 150 000 EUR I can turn that in more than 1 800 000 EUR after 30 years. Looking at that number buying a house looks like a really bad decision form the investing side.

Conclusion

For me buying a house does only makes sense when you have enough own capital and you don’t have to take out a large loan. Of course there is always the wish of having your own house, but paying a mortgage for 30 years does not look like a perspective I aiming for.

What is your opinion about buying a house or renting?

5 Comments

  1. Ciao DCF,

    I agree that buying a house having to contract a loan for more than 50% actual value is a waste of money, but you are missing one point in your calculations… The house will rise in price, quite surely, if we consider a conservative 2% annual rise (the inflation) you get 700K worth of house in 30 years… It’s an investment after all..
    Plus saving rent, plus not being evicted if the owner wants to have the house free, there are also psychological issues to owning a house vs. being always renting.

    ciao ciao
    Stal

    • Thanks for your comment. You are right I did not include the rise in value but I also did not include any repair costs as well and they can be a lot in 30 years. Having your own housr is always better but also having a high mortgage is at least for me worse than renting…

  2. Very interesting analysis. Of course, housing prices for units above 80-90 m2 have escalated precipitously over the last decades. I am also starting to think that the “buying” option may not be all the rage it is purported to, with a couple of exceptions.

    – buying small (i.e. smaller than 55 m2) units for renting to others. The rental value of small units can be higher, whilst having a low cost and you may thus be able to acquire them with little or almost no leverage. The value of these in terms of passive income can be substantial, even if I recognise that there is a lot of work involved in managing real estate versus the seemingly comfortable passivity of just sitting in your sofa and watching dividends fall into your account 🙂
    – buying your own house with leverage that includes fixed interest for x years followed by variable interest. In today’s environment, you may still be able to get a loan with something like 1.9-2.1% interest for 15 years and EURIBOR-indexed interest for the subsequent years. This is advantageous for the bank (as everyone assumes low interest rates can not go on forever) and may be possible depending on your personal credit rating. I would then say, surf the wave while the rate is fixed and try to pay all the remaining credit as soon as possible after that period expires.
    But of course, there might be added Betriebskosten to be paid as an owner which only make the picture a bit bleaker.

  3. Hi there, buying for renting is always an opportunity especially small apartments, another possibility is also buying parking spaces and renting them. But they are hard to get…

  4. This is definitely a subjective topic. I live in Michigan and I personally didn’t have to pay any of the aforementioned fees. My home has actually been one of the best investments I have made in my life so far. I Purchased when the market was depressed and since then the market has risen considerably. I’m currently looking at a $100k profit once I sell this home.
    I can understand why in your situation it is a different story though.

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