Should I buy a house now before prices rise even more?

Question

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).

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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).

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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.

Answer 11

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.

Answer 12

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.