Is it better to buy or rent one’s home?

The baby-boomer generations may have grown wealthy in many countries thanks to a surging residential property market, but today the question of whether it’s better to rent or buy is less clear-cut. While buying a property comes with the potential for growth in its value, it can also entail heavy costs and is inflexible – for instance, if one needs to move for work. Renters who save judiciously may find themselves in a similar financial position to homeowners. So is it better to buy or rent one’s home?

Most housing markets across Europe have seen strong growth in recent years, particularly countries such as Luxembourg, Ireland and the UK, but even in traditionally slow-moving markets such as Germany. In Luxembourg, house and apartment prices increased by 140% between 2010 and 2022, according to Eurostat, with only Estonia (199%) and Hungary (174%) among EU countries seeing bigger increases.

But since interest rates began to rise in 2022, owner-occupiers and other homeowners have found that price growth has slowed and, in some countries, gone into reverse. After more than a decade of vigorous growth, residential property prices in Luxembourg fell by 14.4% year on year in the fourth quarter of 2023. Across the eurozone prices are forecast to drop by as much as 8% over 2023 and 2024, according to a study by insurer Allianz. It has suddenly become apparent that continuing growth in home prices is not guaranteed.

Taking account of the costs

The average asking price in Luxembourg in the third quarter of 2023 was €1,314,360 for a 198-square-metre house. Assuming a deposit of 10% and a fixed interest rate of 4.2%, a 25-year mortgage loan would cost the buyer €6,375 per month, with repayments of €1,912,583 plus the €131,436 deposit bringing the total cost to €2,044,019. However, at that point the house would be an asset worth a minimum of €2,1563,465, assuming price growth of a highly conservative 2% a year, compared with an average in Luxembourg of around 5% during the 1990s and about 7% between 2001 and 2018.

Any capital gain realised on the sale of the primary residence of an individual or couple is non-taxable in Luxembourg, whatever the amount.

This all sounds good in theory, but there are other costs along the way. In Luxembourg, for example, you pay in normal circumstances another 7% in notary’s charges on top of the property purchase price (6% in registration fees and 1% transcription charge). Most governments, including Luxembourg’s, subsidise these fees for first-time buyers, but that is a one-off benefit. As in many countries across Europe, any capital gain realised on the sale of the primary residence of an individual or couple is non-taxable in Luxembourg, whatever the amount.

There are also ongoing costs that need to be taken into consideration. The homeowner is liable if the roof starts to leak or tiles fall off, and will certainly need to undertake repairs and modifications over the years. It is also the owner’s responsibility if they make a bad or unlucky decision, for instance if a ‘gentrifying’ neighbourhood fails to become fashionable, or if a home is undermined by subsidence or termite infestation, unless liability is retained by the constructor of the building or its previous owner.

The joys (or not) of renting

The renter has no such responsibilities – they simply call the landlord and ask them to fix problems (this may or may not happen swiftly). However, it can be more expensive. Average rental costs in Luxembourg City grew by 115.5% between 2010 and 2020, and even faster in peripheral municipalities such as Sandweiler (156.7%), Mamer (164.0%) and Niederanven (171.0%); since the beginning of 2021 the average rental asking price across the country has risen by a further 23% as of May 2024.

The rising cost of rental property is for from unique to Luxembourg – other major cities across Europe have seen similar increases as demand outstrips a constrained supply. Anyone paying €3,000 a month in rent could have spent €900,000 over 25 years, without owning an asset at the end. This is a strong argument in favour of buying, but those who move frequently from country to country, don’t have sufficient disposable capital, or don’t want to risk becoming entangled in the tax systems of multiple jurisdictions, may decide the best option is to rent a smaller and cheaper apartment and direct what savings they can make into financial market investments.

For example, an individual who paid €2,528 in rent and also channelled €1,000 a month into the stock market would have the same monthly outlay as a property purchaser with a €3,528 monthly mortgage loan repayment. Assuming the long-term average for the stock market of around 5% per year, these investments would generate a return of €595,500 after 25 years. An investor might be able to enhance the value of these investments by channelling them through a pension product, which benefits from tax breaks in many countries.

The homeowner is still likely to be far better off when they reach retirement, but if the renter has managed to save, they will at least have a capital with which to generate an income.

Later-life considerations

The homeowner is still likely to be far better off when they reach retirement. The renter still needs to pay rent, while the homeowner can live ‘for free’. However, if the renter has managed to save, they will at least have a capital that can be used to generate an income – or to buy a property for their use at that stage.

As an illustration, the renter’s annual cost may still be as high as €30,000 per year for their smaller home, while the homeowner probably has only to pay around €5,000 per year in upkeep and maintenance. However, if the renter has continued to hold that €595,500 in investments, this can continue to grow as well as pay out income. Invested in the right way, that lump sum could generate an income of as much as 4% per year – equivalent to €23,820 – which would brings the renter’s annual cost down to €6,180.

There are tax considerations, however. Any income received from bond interest, stock market dividends and capital gains will be taxable unless it is held through a tax-sheltered investment product such as a pension plan. This should be a priority for anyone planning to rent and save rather than buying a property.

Flexibility, especially for the young

This category may include members of younger generations who consider themselves global citizens and like to be able to pack their bags at a few months’ notice to go wherever their career takes them and consider opportunities in a range of different countries.

Home ownership is inherently inflexible – houses can be difficult and slow to sell, and sometimes also to rent out. There are inherent complications in trying to manage a property from another country: accidents happen, and they can be expensive to put right. This is not necessarily a barrier, but for someone who places a priority on a maximum of flexibility, it can feel like an encumbrance.

In a perfect world, buying one’s home is probably the right solution for most people, but there are many variables, such as whether continued house price growth can be relied upon in the long term, and the value the renter places on flexibility. Renting is not necessarily a bad option, providing the renter saves judiciously to ensure they can accumulate assets to ease their way in later life.

Since interest rates began to rise in 2022, owner-occupiers and other homeowners have found that price growth has slowed and, in some countries, gone into reverse.