Bavaria and the real estate bubble

324 posts in this topic

There is one more sweet thing about my example that I forgot to mention:
out of the €2.100 monthly installment only between ~ €700 (at the very start of the loan) and ~ €500 (at the end, when you already paid back a good part) gets burned/given to the bank/sent down the drain as your interests.
The rest (€1.400 up to €1.600) is actually used to pay back the loan - so it creates capital for you.

As mentioned before, this does not include the transaction costs of ~ 9% (€77k in this example) and any other costs connected to house ownership. And of course you cannot know if the house value will go down or up, so it is definitely not risk free. And selling a house is not so easy. And, and, and... It is not only sweet.

 

But depending on your situation these numbers may be quite interesting, I guess...

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12 hours ago, TurMech said:

What if i have a period of job loss, sickness, etc. during this period of 35 years?

If i moved to Germany in my mid/late thirties, do i lose my chance of owning my propoerty completely?

 

Would it not be an equal option, if i keep my money in investment tools, and move to my home country after retirement (at the latest)? In this scenario, all the rent i will have paid will be gone, but my flexibility and peace of mind will remain. This  is not something quantitative, but doesn't it have a value also?

Buying is a risk and gamble.
You generally have to stump up a wad of cash up front so on at the end of month one, you are - (deposit + (credit-rent)). This can be quite a lot, if your deposit was 70,000 and you pay 400 more mortgage than rent, then you are minus 70,400 compared to renting.

However if this carry on the way they are, it's possible that over time the rent you would have paid will creep up to what your mortgage is and it could go over. At that point things start to look better on the balance sheet.

When we were looking to buy we deliberately didn't tell any of our neighbors as they had, at literally every conversation about buying, basically shouted anyone down who was considering it. It even went on once they knew we were moving, things like asking if we really knew what we were doing, saying that it's not too late to back out, aren't we too old to be buying. if we'd told them before we bought, things would have exploded and we could now be living with people we don't get on with.  

For us, the guy who took over our flat now pays what we pay the bank for the house. We are just down the deposit but like I said above, it's a gamble.
If things carry on the way they are, eventually the house is ours, if we are lucky it's worth the price plus the deposit, if we are really lucky, it's worth more.
Added to that, if the buying situation is as bad in 30 years we get to give our daughter a good start, she can buy a small flat for us and we can swap. Eventually she gets to inherit the house. In an area where there are hardly any houses to buy, it's a good start.

However, this is all a  gamble, will it carry on the way it is, will the bubble burst, if it does will it stay burst, or recover.

I can't say what is best for you, you have to make that decision and live with it.

I'm over 40 and I just bought a house, so I think mid to late thirties is ok and nothing unusually here.

As you say, rent is flexibility but the money is gone. It's not gone gone as you received something for it, a place to live. It's gone when compared to buying as at the end you have what you bought.

You makes your choice and takes your chance.
 

 

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17 hours ago, krakp said:

What this means is that you can get a house worth €850k for a €2.100 monthly rate (see my earlier calculation) fixed for 15 years, let's say. After 15 years you are left with a big part of the debt (in my previous example it would be about €575k) and you can decide: continue with a new loan, sell the house and pay back, rent out the house etc. So it basically goes down to whether the house value will grow or not. It is not quite the anchor you are describing. And maybe in 15 years the economies will not collapse just yet...

 

That´s my point: I´m paying around that 2100€ in rent for a house that costs DOUBLE that amount.

I firmly believe this bubble in Munich is going to burst in a few years, so this is a terrible investment.

Also in the meantime, as I was not fool to invest in a house, I had over 500% return of investment in stocks, funds and other investments, in 3 years.

The economy now changes way too fast for house investment to pay off. I just wait for the next crisis and invest when it´s low.

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16 minutes ago, MikeMelga said:

That´s my point: I´m paying around that 2100€ in rent for a house that costs DOUBLE that amount.

I firmly believe this bubble in Munich is going to burst in a few years, so this is a terrible investment.

Also in the meantime, as I was not fool to invest in a house, I had over 500% return of investment in stocks, funds and other investments, in 3 years.

The economy now changes way too fast for house investment to pay off. I just wait for the next crisis and invest when it´s low.

 

From Stock Market Expert, to specialized doctor to real estate expert. Is there anything you can`t do?

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9 minutes ago, MikeMelga said:

I had over 500% return of investment in stocks, funds and other investments, in 3 years.

 

Let's be honest, Mike - you will hardly find another investment with this kind of return. I would also not be investing in anything else if I knew how to get this kind of return. Congratulations on your investment decisions! :-)

 

Now - there will still be enough folks out there that will never get this kind of returns and for them house ownership could be an interesting option. Again - it is not about which option is better "in general" (I don't think it is possible to even answer this kind of question) but rather what makes sense to each individual. 

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48 minutes ago, MikeMelga said:

That´s my point: I´m paying around that 2100€ in rent for a house that costs DOUBLE that amount.

 

The problem is you see a mortgage with the same eyes as our parents, which I find very amusing, because you claim to be a very modern guy.   In former time the target of having a mortgage was getting rid of it.    Nowadays with the extremely low interest rate it is not like that, it is taking advantage of the cost of opportunity of that money and the increasing prices in the properties.   So, if you pay 2100 EUR in rent, you could find any property that you could get a mortgage for with a monthly payment of 2100 EUR.   You claim you can't afford your house, that's a fallacy, because with 1% interest rate those 2100 EUR bring you to the 2 million EUR property prices (of course to prove you are right, you will say your house costs 3 million).    Of course it is not optimal to take a mortgage in which you only pay for interest, because you will be risking that the property prices goes down dramatically and you end up losing money.   But even if you take an extremely low tilgung like 1% you still could afford a house a bit over 1 million EUR.    It does not matter if the mortgage is for 15 years or 20 years or 40 years, because the target if not to finish paying but to profit from the cheap money.    Half way your mortgage you can decide to sell the property and pay the bank, if it is after 10 years this won't have any extra financial costs.

 

Quote

Also in the meantime, as I was not fool to invest in a house, I had over 500% return of investment in stocks, funds and other investments, in 3 years.

 

Even if this is true, very little people have the luck and skills to multiply their investments like that.  So this is useless to the average Joe.   It is like telling "Just be Bill Gates" to the guy asking how to make money on technology.

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On 14.7.2020, 09:32:09, krakp said:

 

For a very quick and simple calculation:

Assume interest rate of 1% (possible nowadays)

Assume Tilgung (yearly repayment) of 2% (quite low but also possible)

 

You get 3% per year, which is ~ 25k. A bit over €2.100 monthly. Possible if you earn €4.500 after taxes...

 

Of course the numbers get better if you bring some money up in front (10-20%?)

 

Cheers,

krakp

 

Edit: as TurMech mentioned below, this does not include the side costs (which will amount to ~9% in Munich), so you would need to have another €75k saved...

 

 

 

 

Hopefully, anyone seriously interested in investing in property will take professional advice and 

not just various internet foren...

 

As already mentioned in other threads, rent vs. buy is a decision based on a whole swathe of personal planning decisions,

Here just a few points to consider : 

any 40 year old property will be deteriorating - so may need new roof, new windows, heating / boiler systems last only around 25yrs.

These costs need to be in your long term plan.

 

Any property you purchase to rent out to someone else, creates taxable income as well as

tax deductable expenses (eg roof, windows, boiler from above).

 

Are you likely to benefit from a lump sum from an aging relative in the future?  (I'll disregard lotto here)

Then any mortgage needs to allow for extra lump sum payoffs without penalty. "Sondertilgung" needs to be

agreed up front - and can lead to large savings when you finish the mortgage early.

 

In the end, it boils down to are you a renter - or a property owner "type of person".

 

There are lovely properties outside the major cities - if you want to commute ot

allow your kids to walk to school. If you can't abide the idea of living in the sticks - then 

you're stuck with the high inner city costs of Munich or Hamburg.

 

Choosing where to make the centre of your life is difficult - and any plan may need a change or two later on.

 

 

 

 

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1 hour ago, MikeMelga said:

Also in the meantime, as I was not fool to invest in a house, I had over 500% return of investment in stocks, funds and other investments, in 3 years.

 

This.

 

I could sell all of my investments and buy a house/flat or let my investments keep paying my rent and then some. 

 

People who keep basically saying that renters are dumbasses don't know the full story.

 

I know plenty of people who retired and wanted to downsize their home. Problem is, a smaller home cost the same or more as their current homes. So when you own your home and sell it for a profit, where do you live?

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3 hours ago, fraufruit said:

 

This.

 

I could sell all of my investments and buy a house/flat or let my investments keep paying my rent and then some. 

 

People who keep basically saying that renters are dumbasses don't know the full story.

 

I know plenty of people who retired and wanted to downsize their home. Problem is, a smaller home cost the same or more as their current homes. So when you own your home and sell it for a profit, where do you live?

 

That's an incomplete argument since you are comparing past returns on stocks with current property prices. I can just as easily say that stocks right now are over evaluated.

 

I started investing in property 15 years ago (starter apartment back home, and then property in Munich), I didn't forget the stock market but obviously invested less than otherwise. Now, would I have had better returns if I had stayed 100% invested? Probably. Did anyone know 15 years ago how the real estate and stock markets in 2020 would look like? No. Was real estate in Munich in 2010 cheap all things considered? Yes. Do I have regrets? Many, but all things considered we're doing very well, I could answer your question and say that if we sold all the properties, paid off our remainder debt and invested the rest in index fonds we could  rent somewhere cheap and retire with the 4% rule (or  half-retire, I can't imagine retiring right now). 

 

Likewise, predictions for the next 10-20 years are an exercise in futility. I'm however convinced that 1) governments will try their very best to provoke inflation and thus erase their debt load 2) cities like Munich, Paris and London, will continue to be wealthy cities where the rich like to park their money and people come to work and live 3) there will be a stock market in 10-20 years, and  Covid-19 will be long behind us. 

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As I said, you make your choice and take your chances.

For example, where we live there are very few properties on the market (for rent of buy), even if we had a mini recession that say cut the amount of interested buyers down to a low number, say 50, it would not impact the buying situation - in our area.
There are places to buy elsewhere in the city but the prices here stay high.

There would have to be a major crash to bring the prices down, so bad that the market was flooded by property as people couldn't afford to pay their mortgages anymore.
However having said that, banks would want their cash back, people will want as much as they can get. The bubble has been around a long time and I think it's actively sustained, it hasn't burst yet and I don't think it will.

You make your choice and you take your chance.  

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3 hours ago, mtbiking said:

 

That's an incomplete argument since you are comparing past returns on stocks with current property prices. I can just as easily say that stocks right now are over evaluated.

 

 

If the Fed had decided to let the free market run its course stocks would not be as they are

 

The coronoavirus killed capitalism.

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On 14.7.2020, 22:20:01, krakp said:

And selling a house is not so easy.

 

Why? Isn't there a huge demand, and a limited supply out there in the market?

Everybody i talk to say that, if things go bad (job loss etc.), i would sell the house/flat.

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A house is not like shares... you can't just make 5 clicks to sell a house and buy 2 smaller ones in a different area... Many offers stay in the market for many months. So it is not like you will have huge problems selling in the hot area (especially if you put a good price) but the process takes time. 

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23 hours ago, Krieg said:

 

The problem is you see a mortgage with the same eyes as our parents, which I find very amusing, because you claim to be a very modern guy.   In former time the target of having a mortgage was getting rid of it.    Nowadays with the extremely low interest rate it is not like that, it is taking advantage of the cost of opportunity of that money and the increasing prices in the properties.   So, if you pay 2100 EUR in rent, you could find any property that you could get a mortgage for with a monthly payment of 2100 EUR.   You claim you can't afford your house, that's a fallacy, because with 1% interest rate those 2100 EUR bring you to the 2 million EUR property prices (of course to prove you are right, you will say your house costs 3 million).    Of course it is not optimal to take a mortgage in which you only pay for interest, because you will be risking that the property prices goes down dramatically and you end up losing money.   But even if you take an extremely low tilgung like 1% you still could afford a house a bit over 1 million EUR.    It does not matter if the mortgage is for 15 years or 20 years or 40 years, because the target if not to finish paying but to profit from the cheap money.    Half way your mortgage you can decide to sell the property and pay the bank, if it is after 10 years this won't have any extra financial costs.

 

I see the risk of house bubble and/or increasing interest rates higher than losing money on the stock exchange or some ETF funds.

Our parents (or at least mine) did not invest in stock exchange, they invested in houses, so I fail to see the comparison.

 

In summary, I see a lot of risk in the current mortgage strategy and little gain, compared with other investment opportunities.

BTW, buying a house breaks the #1 investment rule: don´t put all the eggs in the same basket.

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On 15.7.2020, 15:09:35, mtbiking said:

 retire with the 4% rule

 

What is the 4% rule?

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6 minutes ago, TurMech said:

 

What is the 4% rule?

 

 

You spend every year 4% of your invested capital.  i.e. you start with 1 million then you use 40k a year for your own expenses.    This used to "work" in the old days when having a 4%-6% yield from your investments was pretty easy, so you wouldn't run out of money.    However keeping those yields nowadays it is not that easy, still depending on your age, it might be still enough.

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12 minutes ago, Krieg said:

 

 

You spend every year 4% of your invested capital.  i.e. you start with 1 million then you use 40k a year for your own expenses.    This used to "work" in the old days when having a 4%-6% yield from your investments was pretty easy, so you wouldn't run out of money.    However keeping those yields nowadays it is not that easy, still depending on your age, it might be still enough.


the rule is still applicable however:

- most of the money has to be allocated to the stock market thus increasing the risk of losing too much in a depression like breakdown shortly after retirement (worst case scenario)

- for this reason, you need built in flexibility: be able to reduce your expenses more than expected for a while in case of necessity, or work part time. In the end, if you have one million invested you can show your boss the finger if you absolutely need to, and take your time to find some paid activity if full retirement sounds too boring or risky.

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In any event, when using the 3%, 4% or 5% rule, one must seriously re-evaluate annually to make sure it isn't too much. That, of course, depends on the markets. In my case, I was told that I was taking too little out last year. :rolleyes:

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very interesting thread :)

 

one last thing to consider - for anybody with a US citizenship, and living outside of the USA - real estate is currently the only form of investment that doesn't cause a major tax/regulations/reporting nightmare.

 

Just one more reason (at least for me personally) to stay away from anything stocks, funds, bonds, EFTs... whatever else there is that isn't called "real estate".

 

 

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