The Affordability of Owning a Home: A Comparison of the 1980s and Today

For many, the dream of owning their own home has become a distant dream. Increased construction interest, immense construction costs and high real estate prices deter families in particular. But was there more leeway in the 1980s?

When looking at the development of real estate prices, some people may think how easy it must have been for parents in the past to fulfill their dream of owning their own home. In 1988 you paid 190,000 euros for an average terraced house in Germany, in 2020 it was 470,000 euros – an increase of 150 percent.

Data from the Organization for Economic Co-operation and Development (OECD) shows that it is actually easier to own a house today than it was in the 1980s. The affordability index, which the OECD calculated on the basis of real estate prices and income, has been falling for several years.

Real estate prices have increased by 160 percent since 1980; however, if inflation is factored in, real house prices have risen by just 15.5 percent. In the same period, however, real disposable income has increased by 41 percent. Overall, incomes have risen much faster than real estate prices. “Due to the rise in wages, affordability has not deteriorated as seriously as is often assumed,” says Jochen Möbert, real estate expert at DB Research.

Loans used to be more expensive

In addition to house prices and income, building interest also plays a decisive role in the affordability of a property. The rise in interest rates from one to four percent last year came as a shock to many homeowners and interested parties. “While the average monthly rate before the rise in interest rates was EUR 1166, a year later it was already EUR 1505. Rising interest rates mean higher costs for all borrowers and that reduces affordability,” explains Jörg Utecht, CEO of the Interhyp Group.

Interest rates are still at historically low levels. “Compared to the 1980s, today’s interest rate level is still relatively low. In the 1980s, building interest rates of around ten percent or more were not uncommon,” says Utecht.

So loans were significantly more expensive then than they are today, which in turn is reflected in the monthly loan installment. In 1980, the building interest rate was ten percent for a ten-year fixed interest rate, the monthly burden for a loan of 200,000 euros was 2000 euros. Over a period of ten years, the interest costs alone added up to 172,000 euros. Today, with an interest rate of just under four percent, the rate would be 986 euros – the interest costs amount to around 70,000 euros.

Conurbations sought after and expensive

Overall, owning your own property is even more affordable today than it was in the 1980s. Nevertheless, that doesn’t feel like it for many people, as a study by Interhyp shows: Many Germans consider owning their own property to be an unattainable dream. For 51 percent of those interested, a purchase in their region is not or hardly affordable.

According to Möbert, this also has to do with the fact that real estate prices in sought-after regions have risen sharply in recent years. “Especially in metropolitan areas, where many more people live today than in the 1980s, so the supply is scarce and the demand is high, real estate is not much more affordable today.”

In addition, there are sometimes greater hurdles today than in previous decades, for example in terms of ancillary costs. “The costs that are incurred when buying a property for a notary, land register entry or land transfer tax are significantly higher today than in the 1980s,” says Utecht. While every real estate buyer still paid the same tax rate of two percent for the real estate transfer tax in 1983, up to 6.5 percent are due today, depending on the federal state.

Less renunciation in favor of your own home

Despite the increased wages and comparatively low interest rates on loans, real estate buyers have to raise more money themselves in order to be able to pay the additional costs and the often required equity ratio of 20 percent. Reiner Braun, CEO of empirica ag, considers the equity required to be a major handicap: “More and more young families have been failing in this country for a long time due to the equity required. Many are no longer able to save after the rapidly rising prices and property transfer taxes.”

However, this is also due to the fact that people’s consumer behavior has changed, according to Braun. “Families in the 1980s saved more than they do today, partly because they cut back more.” Because what buying a house often means is making sacrifices elsewhere.

And fewer and fewer people are willing to do that, as Interhyp’s affordability study shows. 54 percent – and thus eight percent more than in the previous year – state that they do not want to limit their quality of life because of the financing costs. In the 1980s, the result would probably have been different. However, a property can hardly be managed by making sacrifices alone – neither then nor today.