We rent an apartment in Frankfurt, Germany and we are contractually bound to it for another 1.5 years. We are 33 and 35 years old and there will be children soon. We make around 110k € annually (after taxes) and we have no debt.

We are thinking of buying a house on the outskirts of the city, preferably towards the south. One that we really like would cost 830k €. We don't have that kind of money. We are able to make a down-payment of around 45k € and we would need to take out a credit/loan for the balance.

House prices have risen by 35-40% in our region over the past 4 years. I wonder if we should buy the house now to avoid possibly higher prices 18 months from now and rent it to someone now.

We are rather new to the field and we have never made such an investment, not even for a car. How should we structure the loan? Could we at all?

Addition: Thanks for the answers so far. However, I would like to see a more Germany-centric opinion. It seems that in Germany you can very well pay off the house over 30 to 40 years and banks do give you such high loans. What are my best options?

Summary of the comments so far (in case a mod wants to clean up):

  • Paying off houses in Germany can take 30 to 40 years and is encouraged. Banks do give these kinds of high loans. The question here for me is rather if it will backfire in anyway with our small down payment or if I did not think of other possible issues.
  • We will not move further away from the city, so it has to be in the expensive urban area of Frankfurt
  • We will definitely move out of the city, into a house with a lawn or trees. Even with the first child the appartment is too small already.
  • Buying land and building a house would be an option if land wouldn't be ridiculously expensive or only available far out. So we have to skip on this issue.
  • Only two years ago we finished our studies and could only start putting money on the side then. We first had to pay off some student loans as well and are now saving as much as we can. We are living a simple life style. We've even never had a car yet!
  • We are fully aware about notary fees, taxes etc. Same goes for income cuts during parental leave etc.
  • We do not have a "Bausparvertrag", but since we would like to buy rather now or at least soon, it would not be an option anyway.
  • We do have Berufsunfaehigkeitsversicherung (~ insurance when being unable to work)
  • We would rent the house to a company that can house temporary employees and their families in the house until we will use it by ourselves. There is a big market for this in Frankfurt since there are many big banks etc. Renting to a private person should be fine, too (confine rental agreement to 2 years etc).
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    What are the terms of the loan available to you? Rate and duration. You may not qualify for the level of mortgage you would need. – JoeTaxpayer Sep 11 at 23:14
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    (Germany-specific): Don't rent the house out for 18 months, unless it's to a friend, or someone you know well, or maybe a collegue from a foreign country who you know will return home after that time. If your tenant doesn't want to move out after that time, getting them evicted will take a long time and cause you a lot of stress that you just don't want to have upon you, especially with small children; unless one of you is a lawyer, 18 months of rent just isn't worth the risk. – Guntram Blohm Sep 12 at 9:09
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    Not an answer, but why wouldn't you sublet the place you are in now, and move to the new house right away instead? – user Sep 12 at 11:24
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    That is wayyyy too much money for you to afford. I would suggest rethinking this otherwise you will become a slave to your own house. – JonH Sep 12 at 13:40
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    @Sebastian So what kind of answer do you expect for your question? Are you fishing around for people to convince you to take a gamble in the real estate market. If your decision rests solely on whether or not the price is expected to rise even further then you need to check historical data in your area and consult with a local real estate expert. If you are buying a house for you to live in then do so. If you are buying a house as an investment then take that path instead. Unfortunately, it rarely works out to do both at the same time. Regardless, I wish you the best of luck. – MonkeyZeus Sep 12 at 14:10

12 Answers 12

If I were in your position I wouldn't.

The main reason being that you can't afford that house as is. If you spent all of your income after tax on paying down the house, it would take about 7.1 years, not including interest on your loan, or your own living expenses. That would be roughly a 15 year mortgage, assuming you live bare bones.

The second reason being is that your mindset isn't right. From your question, it looks like you are afraid of missing out on buying a home at a reasonable price, and making money on it in the future. Housing prices aren't guaranteed to rise. If you take out the maximum loan you can afford, and then housing prices go down, your earning potential on that property will go down. If you can't afford to service the loan when you aren't renting, then you shouldn't be taking out such a large mortgage.

Save up a larger down payment, and wait 'til you see a house you can afford. Then buy it. The larger the down payment you make, the less money you will pay on the loan.

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    Why in the world do you think they can't afford it? And no one buys a house on 15 years loan unless they are fairly rich, it's a lifetime investment (so 30+ years easily). – Davor Sep 12 at 13:58
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    @Davor That's typical in the US but 30 year mortgages are largely a result of government policies. In Canada, for example, I've been told that people typically get 15 or 20 year mortgages. – JimmyJames Sep 12 at 14:13
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    @Davor - You're completely wrong on the 15 year loan thing. Usually the 15 year loan is at least 1 point lower than the 30 year loan. When I did the math for my home, it costs only $150 per month more to do the 15 year loan versus the 30 year loan. While $150 is not nothing, it certainly isn't an amount that only "the rich" can afford. – Dunk Sep 12 at 16:19
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    @Davor Look if you want to spend your entire working life paying off a mortgage that's your prerogative. I'd rather live well within my means, taking the money I'd be spending on mortgage payments and put it into something more productive. – billy-bob Sep 12 at 17:27
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    @JamesMoore-It has been 8 years since I last had to care about the issue. From what I remember, at that time, 1 to 1.25% was typically the difference between 15 and 30 year fixed rates but I did just check and the difference is quite small now. Doesn't seem to make sense to get the 15 year for the little savings in percentage that you get. The option to pay extra when you can or pay less when you need the money with the 30 year loan seems worth such a small interest difference. – Dunk Sep 12 at 22:13

I'm from Germany as well and I tried to collect as much information as possible the last month. However, the subject is very complex and depends on a lot of factors.

From what I heard so far (having friends working at big banks), it's typical to have a mortage lasting for 30+ Years. So I'm pretty sure you could afford the house with your current income, especially since you can get a mortage with about 2% interest per year. Just make sure you are allowed to pay extra money to cut down the mortage if you have spare money (5% per year is the minimum, so you could pay 5% additional per year).

However, I think there are three points that you should consider:

First, if you go to a bank, they typically rate the house and will come to a lower price. There is also taxes, agencies, maybe an expert looking at the house and what not. Since the bank will use the house as safety (assuming you don't have any other) you probably have to at least pay all other stuff by your own (which might exceed your net worth).

Second, and more important to me, you wrote that there will be children soon. This will mean that your total income may be cut down for a considerable time, if one of you (or both) stay home or work part time.

Last but not least, many people I talked to thought that the prices on houses will drop eventually and if you have the time to wait it might be worth it.

Did you think about building a house? Once you have a piece of land, it's (at least now) probably cheaper that way (depending on what you want) plus you will be up to date with all technologies etc.

Ultimately, it's up to you to decide (and check some banks on how much money you will get), but I think you should definitely check with your wife what your plans are, once you have children and reevaluate your decision after that.

I think it would be better to raise your net worth to about 20% of the total costs of the house + everything else.

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    @Sebastian as far as I know, getting a loan to have a higher net worth doesnt work because banks see that loan as debts and not as "free money" even if you have the money. And when they check you (Schufa) they will see that loan, except you can get a private loan from rich friends, parents or grandparents. But I'm impressed how much money per year you two make, makes me feel worthless – undefined Sep 12 at 8:28
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    @undefined Well, we are lucky indeed in having good jobs. I hesitated to write that sum down when writing the question since I did not want to show off or something. But the info has to be here in this question I assume. – Sebastian Sep 12 at 8:34
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    "We have it all sorted out" is a bit of a red flag to me. I thought we had done so, too, before the children came. And then it turned out that a lot of things did not go according to our assumptions. Among them: when you have children, your priorities may shift in ways that you did not anticipate. My suggestion: be open to the possibility that in a year, you may not want to follow the plans you made today. Do not take on liabilities that will leave you no flexibility to change your plans. – Stephan Kolassa Sep 12 at 9:06
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    @StephanKolassa I was referring solely to my wife's income. But I will take your concern about changing perspective AFTER having kids into consideration. Thx. – Sebastian Sep 12 at 9:52
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    You, @JonH, seem to have misread my comment you are referring to. I will not take that as a concern after I've had kids, but rather I will take the possible changed perspective after having kids into concern now! It's a little ambiguous, I agree, but your interpretation does not make sense. – Sebastian Sep 12 at 13:49

FYI, houses should not be viewed as an investment unless they are directly generating income for you (e.g. rental, bed & breakfast). Good investments have low taxes and increase in value (to at least enough account for inflation).

Houses (at least in the U.S.) are subject to property taxes which generally run 1 - 3% of the value of the house. If you live in a house for 30+ years, you can expect to pay the value of your house in taxes (yuck!). In my mind, this makes a house a terrible 'investment'. The primary advantages of living in a (cheap) house is that you can fit more people in it comfortably than an apartment. This assumes that your mortgage payment is similar to your current apartment rent.

With that in mind, I'd look for the cheapest house in a reasonable location that is close to work and has reasonable schools.

Things to budget for when purchasing a house :

  1. Home owner's insurance

  2. Property taxes

  3. Mortgage payment

  4. Repairs (e.g. the bigger the house, the more repairs needed)

  5. Furnishings (e.g. furniture)

  6. Specialty insurance (e.g. flood)

  7. Realtor fees (In U.S. : usually paid by the seller)

  8. Utilities (e.g. water/sewer, electricity, gas)

Things to watch out for when purchasing a house :

  1. Is the area prone to natural disasters (e.g. flood, earthquake, hurricanes)?

  2. Lead paint and asbestos (you'll have a little one soon).

  3. Foundation problems (expensive to fix).

  4. Water damage / mold.

Keep in mind :

  1. You should be able to pay your mortgage and expenses on one income. We've used this rule of thumb for both houses we purchased.

  2. You can generate extra income from your home by renting part of it out (e.g. a single room, AirBnB)

  3. The bigger the house, the bigger the mortgage, the more money you spend filling it with useless consumer goods (i.e. crap).

  4. Could you afford to sell your home for a loss? This is what really screwed a lot of Americans during the housing crisis. We ended up having to sell our house for a 20% loss. Fortunately, we could 'afford' that.

Once you've considered these things, then you can make an informed decision on purchasing a house. Just don't fall into the misguided idea that a house is an 'investment' in your future. Unless a house is actively making you money, it is not an investment.

It is very difficult to tell you if prices will rise or not. You can argue that they rose so quickly that they didn't reach their limit yet or the price development is much higher than the development of the loans so they will drop soon. If it was a sure thing that the prices will reach level X, the prices would be X instantly ;)

Looking at your finances, I think that you are investing too much. You need at least a 105% financing. Realistically, you will end up even above 110% because there may be repairs, modifications, remodeling, new furniture, etc. Your income is pretty good BUT you want kids which means you or your wife will need to take time off for parenting. You get money in "Elternzeit" but not that much and maybe you need more time till you get a place in the "Krippe".

I would start by putting money away and get at least a 100% financing with much better credit conditions. Maybe look for a cheaper house.

Some people think that cheap credits are the reason why many people buy their houses now, that the prices drop when the interest gets higher and when many people who are heavily financing their house can not pay their bills and the house is back on the market. Maybe you can get a "Bausparvertrag"(building society contract) now to secure the good credit conditions?

Edit: A kid will change your life. You already have a high income and low savings. Don't expect living in a bigger house with kids gets less expensive and you don't want a house to live ascetic.

@KaiQing since i can not comment:

Additionally, in the USA if you put 20% down you avoid mortgage insurance.

In Germany they prefer it too. The more important border is usually the 10% rule since when you buy a house with value 830k, you pay 10-15% of the price for the notary, the state, estate agents. The bank doesn't have a security for this money that they loan to you. If you don't have it, we talk about a 110% financing, which isn't easy to get especially when you live in the house and you aren't a "Beamter" (someone working for the state, who can't get fired and gets a high pension).

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    +1 for If it is sure, that the price will reach level X, the prices would be instantly X. That's a great way of putting it. – gerrit Sep 12 at 10:37

You do not mention if your down payment already consists through a Bausparkasse account or just a normal cash savings. If not, I would suggest you make one immediately if you are intending to buy in a few years (~5) down the road. This would help in getting a larger loans as well as saving on interests.

There is no proof that the prices are going to keep rising. All it takes is one recession in any of the big economies to cause a ripple in the german economy too.

Do not forget the possible extra legal costs and commissions involved during such a high (800k) sale. Do not feel rushed into buying a home. It's a decision which can affect your whole life ahead. A missed opportunity is better than a bad decision.

Below part is only my personal suggestion: In addition to that, buying a property in an expensive city like Frankfurt, only adds to your budget and may also add to your future home insurances. You need to find the right balance between the budget and the distance you are willing to commute. A home along an autobahn in a direction away from the city, even for a large distance may be a more sensible choice than a home in the other side of the city w.r.t your office. If you are willing to compromise on the city life and willing to commute, you can definitely find a cheaper and more spacious options in case you have kids in the future.

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    Re:"There is no proof that the prices are going to keep rising." 35-40% rise in 4 years certainly has the spectre of 'bubble' written all over it. – Dunk Sep 12 at 16:42
  • @Dunk I'd generally agree, but one thing to notice is that the prices in Germany are rising because housing demand vastly outpaces supply AND housing supply isn't really increasing faster because builders are very risk averse and communities are very miserly with building permits. There is a danger of a bubble sure. The situation is not really sustainable long term, but it has been this way in Munich for example for ~20 years already. – Tim Seguine Sep 14 at 8:43

I was in a similar position as you at your age, in the southern German city that is even more expensive than Frankfurt - today in 2018, it's ridiculously so, and has been for years.

My point of view: I would buy a house for my own use if I had a significant down payment. Until you have significant ownership of the property, you are simply replacing your landlord with your bank - your money disappears just as well. For comparison: when I calculated this through last time (a few years ago), with a concrete offer by my bank, the end result would have been that I would have payed roughly twice the starting price of the house itself (give or take, I can't remember exactly) over the time it would have taken to get rid of the loan. I have not even factored in other stuff like taxes, administrative costs, mandatory costs for any work on the bordering streets, repairs and such.

Sure, at the end of the day, it is your property, but in 30-40 years it is an old house. Today, I am living in a very large house with garden, built in 1978. That's 40 years old but sometimes feels like stoneage. We're still burning oil, the windows are great because we don't need to open them to get fresh air in (I actually like that, it means no chance of mildew...), and so on.

If you get a new house right now, technology will have progressed a lot in 40 years; whatever passive energy goodies, solar, etc. you have today will be outdated or outright broken in that time, and will have to be replaced. Maybe a few times over.

Finally, over all the years, your family situation will change at least twice (when kids move in, and when they move out), so you basically need 2-3 houses to perfectly fit your sizes.

So, my lay advice would be: get what you can really afford (which is subjective; maybe 50%+ down payment?); start small; maybe a fixer-upper; incorporate the thought that you will be replacing your property a few times to upgrade/downgrade as necessary.

At basically no down-payment: forget it. Maybe it would be worth it if you buy in the outback (and live there), but certainly not in a high-price area.

All of this is from a financial point of view. There are others. If it simply is important for you to be an owner; that you wish to be free to do on your property whatever you wish (rip out walls, etc.); if you resent the rent you are paying some landlord, etc., then those benefits may well outweigh the financial aspects.

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    "if you resent the rent you are paying some evil landlord" try to find a better landlord. You shouldn't buy a house without any downpayment, because you are effectively replacing your evil landlord with an evil bank and you are now the one responsible for repairs, so it's a lose-lose situation for you. – Alexander Sep 12 at 18:08
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    I thought it's clear from context that the landlord line is tongue-in-cheek... and I'm explicitly pointing out that replacing the landlord with a bank with little down payment is a fallacy... but sure, I'll fix that landlord quip to avoid misunderstandings. – AnoE Sep 12 at 20:48
  • "2-3 houses to perfectly fit your sizes" This bit isn't wrong, it just surprised me since people in Germany in my experience are usually very opposed to the idea of selling their house to buy a different one. – Tim Seguine Sep 14 at 8:49
  • @TimSeguine, exactly, that's why I listed this another (a bit) problematic aspect for Germans. – AnoE Sep 14 at 11:33

Be serious, you can't afford kids, a house, and a chance to retire at 110k per year if you buy an 800k house. What happens when you change jobs? Staying with one company your entire life just isn't realistic. Neither is assuming the housing market won't collapse. 35-40% is a lot. Might be too much honestly. How much is rent increasing by? Why do you even need a car?

Don't invest in status. Invest in the future for yourself.

Nothing you've said suggests that you can't just rent a bigger place and invest your extra money in stocks and what not.

I was in a situation like this but much more extreme about 14 years ago. Real estate prices had doubled in a few years and I was looking to get married and buy a home. I moved to a different city.

There's one thing that I am pretty confident about when it comes to the real-estate market. Home prices cannot increase beyond what new entrants (e.g. you) can afford. When first-time home buyers are either stretching themselves beyond their means or declining to purchase, the bottom of the market will drop out. This will then cascade up through the higher tiers of the market with the potential exception of the really high-end luxury market.

If you feel strained as a person with a pretty decent income, you are likely not alone. Any recession could trigger a wave of defaults and you could end up underwater. On the other hand, if the job market and prospects for income and therefore demand for homes are all pointed up, you might not find any relief from the increases for a while.

Ultimately the idea that the value of the general housing market will, over the long run, outpace the means of the average person can't really happen. If no one can afford it, no one is buying which means such prices cannot be sustained.

  • "...the bottom of the market will drop out ... prices cannot be sustained" ... Still waiting for this to come true. CA's over-inflated market hasn't dropped - it just spread. People left & drove up neighboring markets instead. OR, ID, NV, TX. Flippers & CA refugees w/cash buy up all the supply, renovate, and inflate the "high-end" & overpriced rental markets in place of what used to be "affordable" starter homes. A few people bought up all the 1000s of bubble foreclosures & rent them out. Developers only build luxury condos - no "starter" homes. We're returning to feudalism. – mc01 Sep 13 at 20:29
  • @mc01 "bought up all the 1000s of bubble foreclosures & rent them out" That's it. That's the bottom dropping out. I think the problem in CA is that in the metro areas, you have a lot of people moving there and not a lot area that's appropriate for development. Too much low-density housing given the demand. If Jared Diamond is right, that demand is not going to last, though. – JimmyJames Sep 14 at 16:14
  • Market demand didn't disappear (people are still moving to SF), and the 'stretching'/paying beyond means for living somewhere didn't drop. All that supply just got consolidated, so people pay an even higher % of income than they would have for mortgages in the same market. Demand for rentals is as competitive as for purchases, if not worse, and new development largely is high-density (luxury condos). High prices & consumer impact were sustained - all the money in the real estate sales market is now simply being paid to/by a much smaller cohort of property owners - but it's the same amount. – mc01 Sep 14 at 17:31
  • @mc01 I'm not sure where you are going with this. Money is money, if I can't scrape together $5000 a month for a mortgage payment, finding $5000 a month for rent (or more based on what you seem to be asserting) isn't going to be any easier. – JimmyJames Sep 14 at 18:31
  • The assertion "prices will drop w/lack of buyers" hasn't (yet) proven true. Rich buyers just turned everyone else into renters paying same $. Too few homes (even if you can afford $5K/mo) cuz those who can pay $500K+ cash buy them first. It is easier to cover (or find new tenants to cover) $5K/mo rent for a 1yr lease than to get a $1M 30yr loan. Markets only "dropped" when banks collapsed due to fraud & theft. Housing costs have only gone up for most people, now locked into renting & out of purchasing due to lack of supply or cash on hand. – mc01 Sep 14 at 22:07

Laws and real estate climates vary by country, but the basic rules of interest and compounding don't. That is just math. When I bought my house I was told that I should not consider my spouse's salary because it was likely to change when we had children. That turned out to be good advice. I was also told that my total house payment (principle, interest, insurance, taxes) shouldn't be much more than 25%, definitely no more than 30% of my income. Following these rules, we ended up purchasing a house that was smaller than the "Jonses", and our realtor wanted us to spend more, but we stuck to those numbers, and now my house is paid off. Things started out easy for us, but after children, money got tight. If we had followed our realtor's advice, we would have been house poor, maybe even had to get rid of it. There were definitely times we were living paycheck to paycheck, and if our house had cost what the business folks told us we could afford, it would have been bad. If I look at what my house cost (about twice my annual salary), I can't even imagine what a house that cost eight times my annual salary would have done to our family finances.

Buy a smaller flat as investment?

If you really want to buy some property, my advice would be to buy a smaller flat in a good location as an investment and rent it.

With your down-payment and your income, it should be feasible and relatively safe to buy a flat for around 200k€. You can get good fixed rates for a 20 year loan and either let the flat almost pay for itself or pay the loan back more agressively.

From a German fiscal point of view, it's much more interesting to rent a property than to live in it.

Your kids might need the flat once they're grown up or you could live in it in case of a separation.

With your income, you could still save while paying back the loan. After 10 years, you could sell the property tax-free and use the money to buy your dream house.

In the meantime, you can stay in your current flat as long as possible in order to avoid huge rent increases.

For reference, I invested in a small flat in Stuttgart 3 years ago and it seems to have been a good decision until now.

I'd just like to point out that there are regions in Germany where the wage to house price ratio is far better than around Frankfurt. Have a look at this post about the Wohnatlas 2017. Those tables (2012-2016 data) give regional average house/flat prices (per 100 m²) to regional average annual wages: Frankfurt is > 15 years' wages per 100 m² and close to the top of the list. I'm not saying you absolutely have to move to the Vogtland (3.1 year's wages for 100 m²) - but large parts of Germany are much cheaper than Frankfurt.

However, if you could imagine living in a somewhat more rural region, no haste is necessary: in many rural regions prices are predicted to fall due to demographics. This would give you time to a) decide with your family what you want, b) save for a substantial downpayment and c) to look for jobs in that region of dreams.

Also, if you say that you're looking outside Frankfurt as you cannot afford a house in Frankfurt, do not forget costs for commuting.

You should definitely buy a house when you can afford it. The money you spend on renting one is lost on you anyway. Whether now is a good time or wait 1 - 5 years, nobody knows.

If you do not plan moving within 3 - 10 years and thus having to sell the house, you should buy it. If it reduces in value (due to market fall in crisis) you still own a house. And you only lose money when you have to sell it. Think about the 2008 crisis. Those who just bought their house in 2007 might feel stupid between 2008 and 20014. But now they own a house that is the same value but probably much more value than in 2008.

I can't speak for Germany, but in Belgium, it is normal to have a loan for 20 years. But since 2008 banks tend to only approve loans if you can put down payment of 10% - 20% of the house value.

Make sure that the house you want is in the state you think it is. Do you expect renovations (soon) then you should also foresee money in the near future for that.

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    Money spent buying a house before a crash is also money lost. Money spent paying interest on a mortgage is also lost. People who can afford to wait through high prices by renting can end up saving a lot of money. – BlackThorn Sep 12 at 15:46
  • @BlackThorn partially true. You never know the outcome in advance. You can just reflect and say "I should have done this or that" or " it was a good choice" . Money spent before a crash is not lost until you have to sell at lower price then that you bought. And on a (european) life, people tend to live longer in one place (house). So on that span of time, it is more likely prices will rise. And when house prices are high, rents will be also high. – roel Sep 13 at 9:54

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