The choice between buying a home and renting one is among the biggest financial decisions that many young adults will have to make. With the costs of buying skyrocketing all accross Europe, more on more are people are choosing to rent over buying. However, is this always the best option?
To answer this question one must consider a many factors, chief among these being the price-to-rent ratio. For those who are unfamiliar with the price-to-rent ratio, the price-to-rent ratio is the mean sales price in any given area divided by the mean annual rent amount.
For example, if home sales average at 250.000€ and the average rent is 1.200€/month, you would do the calculation like this:
Mean house price (250.000€) / mean annual rent (1.200€ x 12 = 24.000€) = 10.4
Calculating the ratio is straight forward but what does it mean and how is it mean't to help you make the decision to buy or rent? One intuitive way of looking at the price-to-rent ratio is to look at as the number of years it would take you to fully pay off a house with your annual rent payments. A price-to-rent of 10.4 means that on average it would take you roughly a decade to fully pay off a house if you bought instead of renting in that area, assuming prices remain constant through out that period. In such cases it is generally advisable to buy instead of rent. Here are some general guidelines on how to use the price-to-rent ratio:
Price-to-rent ratio of less than 15: It’s cheaper and more affordable to buy
Price-to-rent ratio of 16-20: Leans towards renting as a better option over buying.
Price-to-rent ratio of over 21: By renting you are making a much better personal finance choice.
To make this more concrete, we will look at 10 major cities accross Europe and assess whether it is better to rent or buy property in these cities:
Based on the graph above it is only advisable to buy property in Milan (9.6), Barcelona (12.5), Madrid (15.7) and maybe Porto (18). On the opposite side of the spectrum. We have the German speaking part of Europe with Berlin (33.8), Vienna (36.6) and Munich (43.7) all having price-to-rent ratios above 30. This is not to say that housing is on average cheaper in Barcelona than it is in Berlin, but rather it is more financially prudent to rent in Berlin than it is to rent in Barcelona.
If you are wondering what the price-to-rent ratio is in your area, click on this link to visit my interactive dashboard that has the price-to-rent ratios as well average cost per square metre and average rent price per square meter all accross Europe.