Strong demand, low supply – rising prices. The real estate market follows the current economic dynamics and so it is hardly surprising that the price index, based on the 1st quarter of 2004 from 100 to 173 by the 2nd quarter of 2021 climbed . The curve has been rising steeply since 2014 and there does not seem to be an end to the trend at the moment. And this is exactly the reason why we recommend our customers to plan a property purchase thoroughly and not declare it as a suitable investment ies. The dangers of buying real estate are often underestimated. A property is not always a good investment.
Dangers of real estate investment
In view of these developments, the real estate market is becoming increasingly attractive for both small and large investors. Providers promise returns of four percent and more. With the current low interest rates, even a loan seems to be a low-risk way of increasing your own wealth by buying a house or apartment. Especially since real estate is considered a sustainable investment at the latest as an old-age security. But private investors in particular often underestimate the risks of such an investment and ignore worthwhile alternatives. There are four main dangers to be mentioned here:
- Lump risk: A property is a large investment that can quickly cost several hundred thousand euros. Private investors lack the resources to position themselves broadly. Instead of diversifying, for example investing in different regions and property types, they usually put everything on one card. This is at the expense of financial flexibility and the risk of liquidity bottlenecks increases; as is the risk of loss.
- Leverage effect: This risk results from the high amount of investment that usually relies on outside capital -for example through a bank loan- when investing in real estate. Low interest rates promise a higher return on equity due to the faster rise in property value. By using less of your own money, there is supposedly a leverage effect. However, this would have to remain stable for years and decades, otherwise the leverage will be reversed and the investor will bear the higher losses. This risk increases with increasing debt, as lenders hedge themselves with higher interest rates.
- Volatility: In the past ten years in particular, property prices have risen consistently. But the past is not a reliable indicator of the future, as the real estate bubbles in the US or Spain have shown. Can you say with certainty that this development will continue for 20 years and more? The obligations when buying a property are much more serious than with other forms of investment. The money cannot be easily withdrawn or shifted; especially when outside capital is involved.
- Maintenance: This point should not be neglected. Because in the real estate market, money doesn’t just work for investors. In addition to taxes and insurance, the property also needs expensive maintenance in order to secure or further increase its value. Experts recommend calculating with a cost rate of up to 2.5 percent of the current value of the property. That is at the expense of the return. As a rule, credit and maintenance cannot be financed from rental income alone.
Private investors, especially those with little equity, should therefore consider a real estate investment very carefully and calculate various scenarios. Quite a few experts and the banks themselves as lenders see the current purchase sums no longer covered by the property value. A price correction or even a bubble formation in the coming years cannot be ruled out.
Low interest rates – high returns?
The fixed interest rate for a loan over 20 years has been has fallen from almost four percent to 1.5 percent and in the same period the total of housing loans in Germany is increased from 1.11 to 1.58 billion euros . The will to buy a home is therefore unbroken. Building material prices, politics and social developments have a significant impact on the real estate industry and can hardly be foreseen over a long period of time. Prices can fall again. The decisive factor is always the location, but which one is good depends on various factors. Buying is not necessarily cheaper than renting either. If the property price index has risen by more than 70 points since 2004, the Rental price index only increased by 19.2 points . So if you want to build up wealth, you can rent cheap, invest equity and forego the risks of borrowed capital. Over a period of 25 years, for example, more wealth could be built up with stocks than with real estate – and that without any debt. That takes discipline, but it offers fewer risks and more flexibility. A long vacation? Job loss? Unexpected expenses? This makes it much easier to compensate for all of this.
Real estate usually does not offer any protection against inflation
Unlike Gold, the home cannot be classified as consider inflation protection . Maintenance and ancillary costs or taxes also attract here. It is possible that you will soon have to install a photovoltaic system on the roof at your own expense and carry out other energetic renovations. With building material and craftsmen prices rising, these are further risk factors. In conclusion, it can be said that big money is not easy to make with a real estate investment. Too many unpredictables and risks make solid, long-term planning difficult. In addition, there are long-term obligations to third parties such as lenders. Nevertheless, the purchase can be worthwhile and should be considered especially in the course of a diversified portfolio. He just has to be very careful. As an independent investment and financial consultancy, we explain the opportunities and risks of real estate investments to you. Together with you, we will check how buying a house or apartment will pay off economically. To do this, we calculate various scenarios and also show you sensible alternatives. For financing, we compare offers from up to 230 banks, optimize your interest expense and get the best possible conditions for you. Contact us for a non-binding initial consultation.