Real estate is considered a safe investment that is crisis-proof and well suited to wealth accumulation. At least this is the result of a representative survey by the opinion research institute YouGov on behalf of Commerz Real.
In June 2020, around 2,000 German citizens gave their opinion on sensible forms of investment. A total of 56 percent of those surveyed preferred investing in real estate. This means that buying land is more popular than buying gold or stocks. But does the asset class live up to its good reputation and does real estate really make a difference when it comes to wealth accumulation?
Property owners are wealthier
In 2019, the German Institute for Economic Research (DIW) conducted a study on wealth inequality in Germany and found that property ownership is a key factor in determining the net worth of a person or household. The result refers to the situation in 2017 and divides the population into two groups: owners and renters. Owners have significantly higher net worth than tenants. In addition, the discrepancy between the two groups increases with age. While renters reach an average maximum net worth of about 55,000 euros between the ages of 51 and 55, owners increase their net worth to a maximum of about 280,000 euros by the age of 75. Property ownership thus leads to a significant difference in the population. The increase in the difference in old age can be explained by the mortgages. As a rule, young property owners still have high debts on their houses, which they first have to repay over time, whereas older owners have already largely paid their installments and live in their own homes with almost no debt.
Real estate makes up the majority of wealth
In addition to the total net assets, the DIW also looked at the composition and structure of the assets. This provides information about the actual circumstances and the creation of prosperity. For example, net worth may be low despite high gross wealth because debt significantly reduces value. When looking at the five most prosperous deciles of the German population, it is noticeable that real estate ownership makes up a significant proportion of the total assets of these groups of people. In the top decile, other real estate, in addition to owner-occupied residential property, is also gaining in importance. The poorest five deciles, on the other hand, own little or no real estate. It can therefore be said that real estate ownership is one of the greatest value drivers of wealth.
The reasons for a significantly higher wealth accumulation
The wealth difference between owners and tenants can be explained primarily by the respective payments that both parties have to make due to their living situation. Homeowners have usually taken out a mortgage loan to buy or build their home and thus committed themselves to repaying it. The repayment of the loan automatically leads to an accumulation of assets over time, since the debts gradually decrease and the residential property retains its value. Tenants, on the other hand, make monthly payments to their landlords, which only flow out as expenses and do not lead to any increase in net assets. While owners are thus reducing their debts, tenants are only reduced their financial assets.
Another bonus for homeowners has been the very favorable development of real estate prices over the past ten years. On average, real estate prices rose continuously throughout Germany over this period. So, with the boom, the owners’ dwellings increased in value, increasing the wealth of this group even further. In addition, the property-specific payment obligations end with the full repayment of the mortgage loan, so that owners save further costs compared to tenants. You don’t have to pay ongoing rent and have more money for other things.
In conclusion, it can be summarized that owning real estate has a positive effect on wealth accumulation. The DIW study shows that homeowners in Germany are more affluent than renters. This difference becomes more and more apparent with increasing age. In addition, the favorable conditions of the real estate boom also led to stronger accumulation of wealth by homeowners.
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