Is a property suitable for old-age provision?

Financial column by Prof. dr. Steffen Sebastian

Prof. Dr. Steffen Sebastian

Prof. Dr. Steffen Sebastian

"For many, owning a property is not just a personal realization, as the acquisition of owner-occupied property is often seen as an important component of private retirement provision.

Since property prices have risen sharply in the past, the view is widespread that owning a home or your own home is also a good and, above all, secure retirement provision. From a scientific point of view, this is only very limited. For an optimal risk-return ratio in the system, the mix must be right first. When you buy a house, not only the entire assets are invested in an object. As a rule, capital is also added in the form of mortgage lending.

So if you buy a house with 30 percent equity then you have invested over 300 percent of your assets in a single property. From the point of view of risk spreading, this is exactly what you should not do. If the performance of this one property is not as positive as planned, then the supposedly safe investment can become a problem. In principle, the bank can even demand additional collateral if the value of the property falls. "

If house prices fall, the loss of value threatens

"In many locations, especially in the big cities, prices have already risen so sharply in the past that prices are becoming more and more likely to fall, and prices are in the past in structurally weak areas where further outflows are expected Unfortunately, this development is likely to continue, but if the financing is designed to cope with temporary fluctuations in value, then the owner of the property no longer has to pay attention to it not affected.

Another, often mentioned argument for your own property is the fact that you are protected against future rent increases. Although one lives – after complete repayment – rent-free in-house. However, this contrasts with the fact that a property in maintenance becomes more and more expensive the older it is. Here you have to calculate well, if you can afford it and want it. Unlike a financial investment, such as an ETF or securities fund, a property can not be sold in part, if due to repairs, need for care or other causes, unexpected overspending pending. "

As a sole pension unsuitable

"But all this should not stop anyone from buying their own property if the financing is solid and the burden remains sustainable, even if the amortization is high." Favorable interest rates make the purchase of a home very attractive, despite the high prices.

But in any case it is important to make it clear that a property is still a risky and rather inflexible investment. As a sole pension, the self-used property is not suitable. The financial resources must therefore be calculated in such a way that, in addition to the financing of one's own home, substantially more forms of old-age security can be built up. In my next financial column, I'll explain the most important steps for optimal retirement. "

To person

Prof. Dr. Steffen Sebastian holds the Chair of Real Estate Finance at IRE | BS International Real Estate Business School and Director at the Center of Finance at the University of Regensburg. In addition, Professor Sebastian is co-editor of the European Journal of Real Estate Research and the German Journal of Property Research.