In a context of high mortgage rates and a real estate market in recession, it is logical for the home buyer to consider whether it is more worthwhile to buy an apartment or live in rent and invest the down payment in products that provide a higher return. high. Although traditionally in Spain the majority of households reside in owned homes, the most profitable decision in economic terms will depend on several factors.
“Normally, people make a completely wrong calculation: how much I have to pay for the mortgage and how much for the rent,” warns José García Montalvo, professor of Economics at the Pompeu Fabra University (UPF). And he points out that the buyer must always take into account the opportunity cost of allocating money to real estate instead of investing it in another asset.
The first step to know if you are buying at a good price is to analyze the cost per use of the home. To do this, you must proceed to calculate the gross rental profitability, which is the percentage resulting from dividing the annual money that a rental costs by its sales price. For example, an apartment that is rented for 18,000 euros per year (1,500 euros /month) in the Eixample of Barcelona and that costs 353,000 euros would offer a gross profitability of 5% according to the formula: (18,000 / 353,000) x 100 = 5%. Percentage half a point higher than the gross rental profitability in the Barcelona district, 4.5%, according to Tinsa data for the third quarter of this year.
Secondly, the money that the buyer “stops earning by having the money invested in the home” should be taken into account, explains García. For example, if in one year 14,000 euros have been allocated to mortgage payments, how much would that money have earned in another asset. One way to have a reference is by consulting the data provided by the Bank of Spain on the gross profitability of alternative investments in the last 12 months. According to statistics, in the case of rent, it stands at 3.4%, similar to that offered by 10-year State bonds, but lower than that obtained in the Ibex-35 (13.3%%). While a deposit would have earned 2.3% on average.
However, despite it being a habitual residence for which no returns will be received, the buyer can earn money if its value increases over time and ends up selling the property. This information can be obtained by dividing the increase in the value of the apartment by the acquisition price. To calculate it before proceeding with the purchase, you can consult the perspective of the real estate market "or take as a reference the average evolution of housing prices in the last 15 or 20 years," García says.
So if, for example, the square meter of housing in the Eixample district of Barcelona was 4,316 euros in November 2008, in October 2023 it stood at 5,055 euros, 17% more – without taking into account the effect of inflation. Therefore, if the home appreciates in value in the same proportion in the future, it could be sold after 15 years for around 413,000 euros, that is, 60,000 euros more. Although this is an estimate that may end up being wrong, García believes that it must be taken into account when deciding whether to buy or rent.
Apart from the opportunity cost, the person interested in acquiring the real estate must consider in the calculation the costs of the home, such as the expenses and taxes of the sale - which are usually equivalent to an additional 10% -, the Real Estate Tax (IBI ), staircase costs and floor insurance. Added to this is also the depreciation of the home, since after 10 or 20 years of purchasing it it will probably need renovations.
In conclusion, to approximately calculate whether buying an apartment is cheaper than renting it, "the gross profitability of the rental must be compared - in the example of 5% - with the interest rate that you stop earning [by investing the money in the habitual residence instead of doing so, for example, in bonds or in an investment fund], to which the purchase and sale expenses and the home and its depreciation would have to be added, and subtract the future capital gain that would be achieved if would sell in the future,” explains García. Thus, if the gross profitability of the rental is higher than the cost of the purchase, taking into account the interest that is not earned by having the money invested in the home and the increase in the value of the property, “then it is best to buy.” .
As a general rule, he continues, in periods in which “interest rates are very low and housing prices rise very quickly, it is much better to buy than to rent,” due to the strong appreciation that the property is expected to have. . However, in a situation of high interest rates in which, in addition, prices are at maximums and the forecast is that they will go down, "it is probably much better to rent," says the professor.
Although today the majority of home sales are closed without a mortgage, 45% of the operations require the taking out of a loan. In this case, the mortgage interest payment would be comparable to the rental payments, since it is money that will not be recovered in the future, and therefore should be included in the cost of use of the home. While the part of the mortgage payment that is intended to amortize the outstanding capital of the loan would be considered savings, since it can be recovered if the price of the home remains the same or rises.
In addition to calculating the profitability of the sale, there are other factors that must be weighed. The "most important" one, says Javier Santacruz, vice president of the Association of Educators and Financial Planners (AEPF), "is that of vital objectives." Thus, in the event that the buyer wants to settle in a specific city and structure his life in that environment, the most appropriate option would be "a smart purchase", for which it will be necessary to analyze the elements previously exposed together with the economic capacity of the individual. and the conditions of the property.
"However, if the vital objectives do not lead to being in a more or less stable physical place, it is not advisable to buy the usual home but rather rent it," he warns. However, in many cases "this logical process is not followed" and the decision is made only based on whether the rental cost is less or more than the mortgage payment. "That's the worst way to approach one of the most important investments of a person's life," Santacruz declares.