Here’s something to make you angry: if you were born in the 1950s, by the time you were in your 20s you could afford a house on an average salary. The unaffordable prices of apartments and houses you’re used to have only really been a thing for the last few decades, as housing prices have skyrocketed, while wages have stayed almost the same, when adjusted for inflation.
Source: Deutsche Bundesbank
The benefits of buying instead of renting are clear: instead of giving someone money, you’re investing it into a property you own, with the goal of one day no longer paying rent, and even possibly making money when that home increases in value.
It’s one of the biggest financial problems of this generation: homes have become unaffordably expensive for anyone who doesn’t benefit from inherited wealth or making in the top 1% of salaries.
So is there any hope for those of us who still want to own a house one day? Let’s take a look.
When we talk about affording a home, we really mean two things: can you afford to save up a big enough down payment, and can you afford the monthly mortgage payments. Both of these are important, but the down payment is often the bigger first hurdle for would-be owners.
If you’re not familiar, a down payment is a larger sum of money you pay upfront when you buy a house. Let’s say the house costs 500,000 euros. You might decide to have a 20% down payment, which would in this case be 100,000 euros, and take out a mortgage for the rest. The higher the down payment, the lower your monthly cost in repaying the mortgage.
Most down payments range between 10% to 20%, though you can absolutely go higher if you want.
Then come the mortgage payments. These are more similar to the rent you pay, except that instead of going to a landlord, these go to the bank to repay your loan. In addition to the money you borrowed, there’s interest, which can vary depending on what kind of agreement you have with your bank, and how interest rates are currently in your country. (For more on that, read our interest rate primer here.) There are also different lengths of time you can take to pay the money back — usually from 10 to 30 years. The lower the length, the higher your payments, but the sooner you’ve paid off the house and can live without payments.
If you want to play around to see what kind of monthly payments you can expect, there are tons of calculators you can play around with, including this one for Germany that considers your salary in the calculation of the mortgage.
Right, yes, so far we’ve really only explained how mortgages work. So let’s take a look at how and whether these are affordable.
Your first concern will be affording a down payment. If you live in a big city in Europe, you’re probably looking at a purchase price over 400,000 euros, even for a small apartment. That means even a 10% down payment would be 40,000 euros. If you’re starting from nothing, saving up that kind of money can take a while — even if you set aside 500 euros a month, you’d be saving for more than 6 years.
Here’s where things get even worse: in six years, you’ll probably need to have saved more than the 40,000 euros because home prices got more expensive again. You’ll need to calculate that into what you save extra each year. For example, if home prices rise by 5% each year — which they did in 2020, you’ll have to add 5% to what you save each year. Those 40,000 euros, six years later, suddenly become 51,000 euros.
If you’ve figured out how to afford your down payment, your next step will be figuring out your monthly payment. Using the mortgage calculator, you can see what kind of payments would be coming at you depending on your down payment and the price of the property. Here, the question of whether you can afford the payment follows the same rules as rent: you want to keep the payment to no more than a third, and absolutely never more than half, of your net monthly income.
For an apartment that costs you 400,000 euros, using the calculator above, you could be looking at payments easily north of 1,400 euros, which would mean you’d want a net monthly income of around 4,200 euros.
Great, so it’s all bad news?
Not quite. While prices may be high, and wages haven’t kept up with them, you still have options.
One is to find a home outside of a big city. In suburbs and smaller towns, home prices tend to still be lower than in major urban areas. You can also generally get bigger homes for the same price, as land isn’t at a premium the way it is in dense cities.
Then, there’s investing. If you manage to invest your money and make a healthy return on it each year, you can grow it faster than house prices increase, and get a bigger down payment saved with a bit of time. Remember that example from above, where you were saving for a 40,000 euro down payment by putting away 500 a month? If you invested that money and got an 8% return each year, you could save up that money over a full year quicker.
Now, that does assume your investment doesn’t lose value, and remember that there’s always risk in investing. But an 8% profit is seen as realistic by investors even for more assets seen as less risky.
So yes, it’s not easy to own a home in the current market. But that doesn’t mean it’s impossible, and it especially doesn’t mean you can’t do it. If you’re lucky enough to be able to save money, and can invest it wisely, home ownership might be in your future.