Deciding whether to rent or buy a house in Europe depends on key factors influenced by the current financial climate, marked by high interest rates and inflation. The European Central Bank’s policies have led to expensive loans, making homeownership costlier, with mortgage rates in Cyprus, Greece, and Spain reflecting this trend. While housing prices have dropped slightly, rents have surged in countries like Estonia, Lithuania, and Ireland.
Buying a house requires significant upfront investment and ongoing expenses but offers long-term value growth. This option suits those with capital seeking a stable, long-term investment. However, it comes with the risk of increased mortgage payments if interest rates rise further.
Renting provides flexibility and lower initial costs, making it an ideal choice for those needing short-term housing solutions or uncertain about their long-term plans. Despite not building equity, renting allows for easier relocation and avoids maintenance costs.
Your decision should hinge on your financial stability, market conditions, and lifestyle preferences. Assessing your situation and market trends will guide you to the best choice between renting and buying in Europe’s dynamic housing market.
Understanding Europe’s Banking Situation
The banking situation in Europe is largely governed by the interest rates defined by the European Central Bank (ECB). These rates define how expensive it is for commercial banks to borrow money, how costly individual loans are, and then how feasible it is for the loans to be paid off.
When the ECB lowers rates, it is cheaper for commercial banks to borrow money, and when the central bank raises interest rates to fight inflation and devaluate the euro, it is more expensive for commercial banks to borrow money. As commercial banks have to pay more to borrow money when rates are high, the money they then provide to their customers as loans is also high, and it is here where loans may turn red and debt starts piling up.
Faced with the question of when interest rates will be cut in Europe, ECB President Christine Lagarde said on January 11, 2024, “I think that rates, barring any further shocks or unexpected data, will not continue to go up. And if we win our fight against inflation, and if we are certain that inflation will indeed be at 2%, at that point rates will start to go down.” (ref: Reuters)
Banks of countries within the Eurozone offer loans at different rates to borrowers, depending on the country’s internal economic circumstances and the costs of borrowing money. Some examples of recent interest rates on house loans are:
Cyprus
According to the Central Bank of Cyprus in a report released in November 2023, “the interest rate on loans for house purchases increased to 4,42%, compared with 4,29% in the previous month.”
Greece
According to the Greek City Times in an article referring to October data, Greece offers an interest rate of 4.49% for housing.
Spain
In an article from HTBIS in October 2023, we can see that in Spain “the average mortgage has an interest rate of 3.24%.”
At its last meeting in 2023, the bank decided to keep its key interest rate stable at 4.50%, which brought about hopes of a rate cut in 2024. (ref: ECB) These hopes seemed to be dashed on January 5th, 2024, when data showed the Eurozone’s inflation jumped to 2.9% in December, “supporting the European Central Bank’s case to keep interest rates at record highs for some time, even as markets continued to bet on a rapid fall in borrowing costs.” (ref: Reuters)
Is inflation impacting housing?
IInflation and High Interest Rates are Hurting Europe’s Housing Market
According to Eurostat for the third quarter of 2023:
- · House prices were down by 2.1% in the Euro area and by 1.0% in the European Union compared with the same quarter of 2022.
- · Rents increased in 26 EU countries, with the highest rises in Estonia (+218 %), Lithuania (+170 %), and Ireland (+100 %). The only decrease in rent prices was recorded in Greece (-20 %).
These statistics show the tighter financial situation has ‘reduced the affordability of and demand for real estate assets, putting downward pressure on prices.’ (ref: European Central Bank).
Numbers don’t lie, and according to the numbers above, if you have the capital, now could be a good time to buy a house. Even without the capital, you could look into mortgage loan possibilities and, together with the following factors, investigate your options further.
Renting vs. Buying a House in Europe: What to consider
When it comes to deciding which road to go down when it comes to the housing market, financial considerations for homebuyers and renters are the most important factors.
Here is a breakdown of these financial factors for both buying and renting a house.
Upfront expenses
Buying a house: If you are going to get a mortgage to buy a house, you have to pay the deposit along with other associated fees, including notary and appraisal fees. Other than this, you may have to pay estate agent fees along with VAT, notary fees, and the cost of filing the deed of purchase and sale. (ref: Santander)
Renting a house: You could be expected to pay one or two months’ rent in advance together with a tenancy deposit.
Monthly payments
Buying a house: Monthly payments include your monthly mortgage payments if you have a loan, real estate taxes, homeowners’ insurance, and in some cases, private mortgage insurance. (ref: Investopedia) On top of this, you will have utility bills.
Renting a house : When it comes to renting you will have to pay a monthly fee as rent in most European countries (weekly costs in others). You can also expect to pay utility bills, council tax, and a tv license fees (UK). (ref: citizens advice)
Long-term financial implications
As housing can put a strain on your net worth and your monthly pay cheque, it makes sense that it will have long-term implications on your financial landscape.
Buying a house : If you get a mortgage you are committing to paying off the loan for an average of 25 years. If you have the money to buy a house, then you are investing that capital in property, and this kind of investment cannot easily be liquified and used for other purposes.
Renting a house: When you rent a house, you know you are committing to paying a certain amount of rent a month for as long as you decide to stay in this housing lane. This money will not be used for investment purposes, and it may be considered throw-away money by some standards unless the house is also used as a place of business.
Financial factors may come first, but personal preference comes second. You may have been dreaming about being a homeowner since you were a child, or you might be against putting down roots because you want the flexibility to move whenever it suits you.
Long Term Planning
If you are more prone to buying a house because you want to be in it for the long term, then you should understand:
- Investment potential—Purchasing a house can lead to safe haven investment growth in volatile economic conditions. This means you can sell it when times are rough, get any profit, and invest in other ventures.
- Homeownership advantages — Many European countries provide tax advantages to homeowners. Cyprus, for example, offers a reduction in VAT from 19% to 5% on the purchase of a new property. (ref: Republic of Cyprus Ministry of Finance) Foreign buyers of houses in Cyprus are also eligible to gain Cyprus citizenship and residency if they buy a new house or apartment for a minimum of €300,000. (ref: Global Citizen Solutions)
- Mortgage rates in Europe — After the ECB left rates stable at its December 2023 meeting, lenders were able to “price the typical 5-year fixed-rate mortgages at a little under 4%. Variable interest rate mortgages from private banks are running at about 5.3%.’ (ref: Knight Frank)
- Long-term property investment—Buying a house means you own one of the most secure assets in which you can invest. Not only is it a secure investment, but its price is very likely to increase over time. Just make sure you do not go over budget when you purchase a house and that you choose a location that has development potential.
- Houseownership risks — Owning a house to live in means you are bound to one location. It is more difficult to move somewhere; the house could lose value; it will need to be maintained; and if you decide to sell, it may take some time for a transaction to go through.
Short Term Planning
If you are more prone to renting a house because you want to be freer to change locations, then you should understand:
- Renting flexibility — When you rent a house, it is easier to move to a new location. All you have to do is tell your landlord in advance, find a new house to rent, pack your things, and go. It is also easy to move to a more affordable house if your financial situation changes or the price of the house you are renting goes up considerably.
- Renting benefits — Unlike owning a house, when you rent you have no maintenance costs and you do not have to pay for real estate taxes. (ref: Investopedia)
Making the Best Decision to Buy or Rent a House in Europe
You may know the financial factors, and you may pair these with your personal preferences. Still, you also have to run a risk assessment in real estate with both options under the current banking situation before you can make the right informed decision.
Assessing the risks of buying a house — interest rates could go up further, bringing your mortgage payments up. If these payments go up considerably, you may not be able to fulfill your financial commitments, and the bank could repossess the house.
You can shield yourself from these risks by analysing your financial situation and ensuring you can afford the house and associated expenses. Also, ensure you have enough wealth to cover any rise in expenses.
When getting a mortgage, be sure about the repayment terms and potential penalties. That way, there are no financial surprises after you buy the house.
The choice of house is also important when mitigating risk. Choose a house in a developing area or one with development potential. The value is more likely to go up and it can be easily sold if the expenses become too much for you.
Research
If you are looking to buy a house that is being built at the moment, then you should also consider doing some research into the real estate developer behind the project by:
- Check out their website and meet them face-to-face so you can get a better feeling of their loyalty to projects and how transparent they are about their business.
- Talk to other homeowners who bought houses from the real estate developers you are considering to learn about their experience and if they are satisfied with the work.
- Make sure the developers have a strong understanding of local zoning regulations, building codes, and the permits needed for the project.
- Talk about pricing and costs so you can be sure the developers can provide you with a clear breakdown of costs. This prevents you from being caught off-guard with any extra costs down the line.
- Carefully go over contracts and agreements before signing anything. You could also seek legal advice so you know what will happen if the house is not finished on time or if the project is abandoned halfway because of any unforeseeable circumstances.
Assessing the risks of renting a house
You can safeguard yourself from this risk and be more carefree in the decision you make when it comes to a specific house by doing the following
- Negotiate the rent. If you like a house and want to rent it but the price is too high, negotiate the rent with the owner. Maybe promise a lump sum upfront or find reasons why you think the rent should be lower.
- Read the rental contract carefully. Before you sign off on a certain house, read the contract carefully and make sure there are no hidden expenses.
- Budget correctly. Make sure that after rent, you still have enough income for your daily needs and that you have a little left over. In this way, you can pay more rent if need be.
- Insure your belongings. When you rent a house, you do not have to pay to insure the house because you do not own the house but you will own the possessions you put into the house. Make sure you insure your valuable possessions to safeguard yourself from being financially affected by any burglaries.
- Research the neighbourhood surrounding the property. Ask yourself about the local community, if the people who live around the area have the same values as you, and if the way you live coincides with the area. You might have small children, for example. A close by school would make things more convenient.
If you think the risks of buying a house are less than those of renting and you want to explore that route, then here are the first steps to becoming a house owner.
The First Factors to Consider Before Purchasing a House
- Research the current banking situation. Read up on recent news articles to do with banking, talk to financial advisers or bankers, and map out how the current situation fits into your house purchase.
- Monitor market trends. Companies and individuals are working hard to decrease our carbon footprint. In the real estate market, this has to do with houses that are more environmentally friendly. Some governments provide grants to encourage the use of renewable energy sources and energy savings in recently developed houses .
The European Commission also provides financial support for building renovations in some European countries. This trend could save you money when it comes to your initial investment and your long-term running fees.
- Seek expert advice. You could hire real estate attorneys, home inspectors, or appraisers to make sure you are getting the best deal.
- Understand mortgage options. Visit several of your local banks to see your options. Compare them and decide which one suits your investment better.
Conclusion
The decision to buy or rent a house during the current banking situation in Europe is a difficult one. Understanding the banking situation and how it could evolve is the first vital step to making a decision when it comes to housing. Interest rates and inflation are still high, making loans and the cost of living high.
Each one of us has our own way of looking at situations because of our personal preferences, our family circumstances, our finances, and our future goals. If you are still not clear, then write down a list of the advantages and disadvantages of each and see which ones ticks more of the positive boxes. Only then can you be sure of the direction you will take and be able to make a house a home.
