Sarah dreams of owning her own residence. Her parents advised her to buy conventionally, while a couple of friends would like to finance their residence via lease purchase. What is currently the best way to buy a property? Does financing via conventional means or lease purchases make a difference? And how does the rental yield compare to the interest rates? We clarify these questions, look at the development of rental yields compared to interest rates, and explain how rental and purchase prices, as well as interest rates, are formed.
We start with the development of rental and purchase prices.
Source of rental and purchase prices: VALUE Market Data Analyst; retrieved: November 16, 2022
In the period between Q1 2012 and Q3 2022, rental and purchase prices for real estate in Germany increased. What is clear is that purchase prices have risen faster than rental prices.
Source of rental yield: VALUE Market Data Analyst; queried: November 16, 2022
Source of lending rates: Deutsche Bundesbank Eurosystem, effective interest rates banks DE / new business / housing loans to households (annual percentage rate of charge including costs); queried: November 17, 2022
Over the same period, rental yields have fallen. This is what happens when rents do not rise as quickly as purchase prices. The rental yield can be calculated quite simply. It is the quotient of annual rent by purchase price.
Rental yield = annual rent ÷ purchase price
The course of interest rate development is not the same as the course of rental yields. We see that rental yields and interest rates have recently crossed. So for Sarah, it’s getting more and more expensive to finance a property conventionally.
Source: Own calculation based on the above values. made; December 13, 2022
To illustrate the difference between the development of rental yields and interest rates, we next look at the respective changes from quarter to quarter. While the change in rental yields between quarters was relatively stable, the change in interest rates between quarters was very volatile. This means that there is a disconnected trend between rental yields and interest rates.
The interest rate for real estate financing is based on the prime rate of the European Central Bank (ECB). The interest rate for real estate financing is calculated by adding the profit margin of the respective house bank.
In contrast, rental prices and purchase prices depend on supply and demand. What happens in the market is determined by the people who negotiate prices for real estate and match them with comparative figures from the market. This is fair for all parties.
Digitization has helped make market activity even more transparent and verifiable for everyone.
Conventional real estate financing, with its fluctuating interest rates, has already put many real estate buyers in a financial bind. That’s why it’s good to think about the different options for real estate financing in advance, just like Sarah.
The crowd platform SUKUUK takes a completely different approach to rent-based real estate financing (ijara and musharaka). At www.SUKUUK.com, you can gain insight into a better way of real estate financing.
Your SUKUUK team
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