Real estate: 3 reasons why owners are richer

“Whoever has money often owns real estate. But it also applies: If you own real estate, you often have money. In fact, real estate seems to be the source of wealth. There are three reasons behind this.

Real estate buyers have to bring a lot of money with them. Without sufficient reserves, the dream of owning a home cannot be realized. Right now, in view of the sharp rise in interest rates on loans, houses or apartments have become unaffordable for many, as we described in a large analysis. What is much more exciting, however, is that the connection between real estate and money is also true the other way round: whoever owns real estate often also has money.

But is there really a causal connection behind it, so is real estate the cause of wealth – and not just a side effect?

The leverage effect of real estate investments

Of course, it also plays a role that the prices of residential real estate have risen massively in the past ten boom years - up to the first half of 2022.

Real estate owners achieved high increases in value. Because real estate is traditionally bought to a large extent on credit, this brings owners a particularly strong increase in assets. Because they achieve the entire increase in value, but only raised a smaller part of the purchase price from their own capital. 

If you only spend 100,000 euros in savings for a 500,000 euro property, you can achieve 100 percent profit on your own investment if the price of the property increases by 20 percent. 

It's just stupid that this lever also works in the other direction: If you lose 20 percent in value, your own investment would be practically ruined.

But in the positive scenario, a high return remains even after deducting the interest on the loan. Some coaches and gurus, who want to help others to get rich quick, therefore see real estate investments as a particularly attractive investment strategy.

However, this increase in wealth, which is directly linked to real estate, alone cannot explain the differences between real estate owners and people who do not own real estate. There is another, even more profound factor, as shown by a study by the Empirica research institute commissioned by the LBS Federal Office in Berlin on “Homeownership in Germany”. According to this, the acquisition of owner-occupied residential property is “tantamount to setting the course”. It leads “to structurally different life plans and wealth paths”.

Owners and self-users of the property save more than twice as much

That sounds comprehensive, but also abstract. The study reads that what is meant is that home ownership is associated with a voluntary or at least implicitly desired obligation to save. In order to illustrate this effect, the savings behavior within the same income brackets was evaluated – separately for owners of owner-occupied living space (“owners”) and for tenants. 

This shows that "the savings rates of owners in all phases of life are always twice as high as for tenants of the same age and in the same income bracket," writes study author Reiner Braun from Empirica.

Households with a monthly net income of between 2,000 and 3,000 euros were examined in detail. Broken down into age groups, it was then shown that households from under 40 year olds made the highest savings, both for owners and for tenants. The monthly savings for tenants in this age group was a good 200 euros. For self-users, on the other hand, it was around 500 euros, i.e. 300 euros more. Expenditure on property maintenance and repayment of home loans - both of which contribute to wealth creation - seem to simply add to other savings efforts, without homeowners saving less elsewhere.

  This effect continues in older households, except that expenditure on maintenance and loan repayments gradually decreases. Only in pensioner households from the age of 64 does the saving behavior differ significantly from the other age groups (both among tenants and among owner-occupiers), which fits well with a normal life plan with a savings and dissaving phase.

According to the study, the purchase of residential property "as a result curbs one's own impatience or even unreasonableness and moodiness". That sounds a bit old-fashioned and suits the study client, a building society.

It tastes best at home

However, the study also determines how owner-occupied households accomplish this savings feat. The spending behavior of the youngest age group of 30 to 44-year-olds with a household net of between 2,000 and 3,000 euros is evaluated in detail on the basis of official statistics (the income and consumption sample from the Federal Statistical Office, with data from 2018).

This shows which items owner-occupiers spend more money on than tenants - and where less. Structural differences between the two groups that have nothing to do with the type of household - such as the number of children - were eliminated. 

Self-users achieve the greatest savings with food and drinks away from home. They spend 32 percent less on it than tenants and achieve 14 percent of their total "underspending" with this item alone. With 48 percent less spending than tenants, owner-occupiers are even more limited when it comes to “external transport services”, such as monthly tickets for local public transport. These ultimately account for eleven percent of their reduced expenditure. The expenses are also lower for package tours (-39 percent compared to renters), which results in nine percent of the reduced expenses.

Is it financially disadvantageous to rent?

However, owner-occupiers are also more willing to spend on a few items, such as insurance (66 percent more, which accounts for 13 percent of the additional expenses) and furniture and furnishings (43 percent more than renters, 12 percent share of the additional expenses). The bottom line is that their consumer spending at a comparable income level is significantly lower, as described.

There also seems to be some changes over time. In the past, for example, owner-occupiers would have restricted themselves when it came to car expenses. However, this seems to be less the case now, says Reiner Braun from Empirica. Perhaps this is due to the trend towards living in the surrounding area, which often still requires a car as a means of transport, says Braun.

In addition to the increase in assets due to rising real estate prices and the greater efforts to save by owner-occupiers, there is a third advantage that brings asset growth. 

While renters' housing costs increase over the course of their lives, owner-occupiers can continuously reduce their housing costs. 

In the income class with a household net of 2,000 to 3,000 euros, the monthly burden for owner-occupiers, including interest and repayments, is still an average of 97 euros more than for tenants under the age of 40. This is not surprising: unlike the tenants, the owner-occupiers form real estate assets - so the expenses cannot be compared one-to-one.

From the age of 40, however, the ratio is reversed: self-users now pay less. And with each older class of household, the advantage increases. In the age group from 64 years your advantage is on average 203 euros per month. In large cities with more than 500,000 inhabitants, it is even an average of 234 euros that owner-occupiers “save” monthly on housing costs compared to renters.

Owner-occupiers also pay lower ancillary housing costs per square meter. They live more often in detached and semi-detached houses, where there are typically no expenses for a caretaker or an elevator - unlike in a typical apartment building. However, because owner-occupiers typically live in larger areas (according to the study, the difference is around 40 square meters on average), they still pay a bit more in ancillary costs, both “cold” ancillary costs and heating costs. Although the value per square meter is smaller, the number of square meters is correspondingly larger - and the latter effect predominates. However, because the owner-occupiers can save on the rent and reduce their loan expenses over the course of their lives, the bottom line is that there is an advantage in terms of housing costs.

When renting is a financial disadvantage

So is it financially disadvantageous to rent? The study does not allow this conclusion. To answer this question, ownership and renting must be compared comprehensively. After all, owners also tie up a lot of capital in their property, while tenants do not. The tenants can therefore theoretically invest more capital away from the real estate market and ideally achieve high returns, for example with shares. 

We have described here how buying and renting can be meaningfully compared.

However, the study indicates that in reality tenants do not use their greater financial leeway. 

With a comparable income, they spend more on consumption instead of investing the money that is not needed for interest and repayment of a loan. And when it comes to saving, tenants invest more conservatively, at least in the income bracket considered by the study with a household income of EUR 2,000 to 3,000: the share of savings accounts among tenants is higher in practically all age groups than among owner-occupiers. When it comes to the share quota, the owners are almost always in front.

It is possible that the decision to buy a property is actually a stepping stone: it goes hand in hand with a willingness to make systematic, long-term investments at an early stage. And that shows not only in your own four walls, but in all areas of life.”