How much should a mid-terrace house cost per square meter today?

Dear KarstenausNRW:

I find your posts very constructive and helpful, especially because they show me the other side of the argument. It is important to me to understand what I have to consider when determining the price in order to get a realistic view of whether we can afford the house and whether we want to afford it. I can fully follow your argument that it is a simplistic calculation to equate rent with the annuity. Because it is true, I have to compare with the tenant who is also saving or investing money on the side.

One thing is unclear to me, though. Maybe you can give me some guidance here again: You calculate that with €1500 rent and 4% interest, I can get a loan of €450,000 if I use my rent as interest payment. Together with my fictional €150,000 equity, that results in the €600,000 you calculated for me. So far, so clear. What I don't understand is this: Why should the money from the bank be just as expensive as the rent?
An example: Three years ago, construction interest rates were below one percent. At that time, with rent of €1500 at one percent interest, I could have taken out a loan of €1.8 million. Adding my equity, I would have had nearly €2 million for the house so that I would not already be amortizing with the rent at the same time.
Or in the other direction: Let’s assume the ECB raises the key interest rate to 8% within the next 12 months (whether this is realistic is left aside here). Then it would only be enough for a loan of €225,000. Adding my equity of €150,000 again results in only €375,000 for the house. A price that has already been considered almost ridiculous here.

That would be a directly anticorrelated behavior of interest rates and construction / purchase prices. However, the latter have by far not decreased in the last 3 years as much as interest rates have risen. So if interest rates and prices are not coupled: where does the assumption come from that a reasonable price arises precisely now when rent is equated with the interest payment for the loan?

Where is my error in thinking?

I hope I was able to explain this well here. It is not my daily bread.

I would think carefully about whether moving is worth it to you. From “stubbornness” to not pay the final price and move is a matter of taste.
You say it is not your dream house. Say goodbye to that thought. Even a new build is a compromise between finances, location, timing.

I would bet on the trust card and signal interest. You were asked first. That is a good sign.

The chance that you have the choice between this house and a “dream house” is small. Otherwise, you would have a dream house, not this one.
Quality of life and established contacts would be more important to me than a large garden.

The question is not "what should a terraced house cost?" but "what can it cost and what is it worth to us?" Even if you bought and later find something else, the money is probably not gone on a sale. Your “either-or” considerations probably stifle the best solution.

I think you hit a good point here: We simply have to weigh what is more important to us: staying in the stable living situation we currently have or soon having to consider a move, possibly preceded by building a house, with all the risks and opportunities that entails.

In the end, it remains the decision: invest money now or keep the money for a while longer, save some more, and stay flexible a little longer. Although we don’t have that much time left. Contrary to a guess made by KarstenausNRW, unfortunately, we are no longer the youngest (mid-thirties).

You are also right: stubbornness should not be the decisive criterion here. But the question of whether the property is ultimately worth the asking price to us.

[...]

For the seller, one thing is important: money in the account. Whether it comes from the current tenant or the new owner – who cares.

For the buyer, it looks quite different:
- The owner-occupier wants to get the existing tenant out as quickly as possible and then live in the house
- The investor wants to raise the rent for the tenant
- The current tenant wants to avoid searching for a property, moving, possibly longer commute, possibly changing schools, etc.

So yes, if you get along with the house, the neighborhood is nice, the school and commute fit, that is already worth something. What would be the alternatives? If the owner wants €600k for the current house and there is one next door for €200k, of course, but that does not seem to be the case. So yes, use the trust advance, start talking, feel free to show your own calculation but also accept the completely different calculation of the seller.

I do not see seller and buyer as decoupled: Sure, for the seller it is mostly about the account balance in the end.
One also needs to be able to realize the profit, which is difficult without a buyer. You named reasons against a purchase: an owner-occupier who cannot move in immediately, an investor who has difficulties raising the rent, a tenant who does not want to move out.

Clearly: The alternative would be to build ourselves in 2 or 3 years in a place that better fits our living situation. Until then, presumably some changes will still occur (job changes, children moving from kindergarten—which is 30 km away—to school).
Until then, of course, we would prefer not to move anymore.

With the land value and a house from 2016 with the data given, I would also estimate at least 500k to 600k. A purchase price factor of 30 and more and a gross yield of 3% is normal today. Your offer will be so embarrassing at 5% yield that the landlord will doubt your seriousness. And new builds from 2016 have not dropped in price but have certainly increased in value by at least one-third since 2016. If your landlord bought the house back then for 350k to 400k, she can now easily sell it for 500k-600k. And she still has your rent. And that’s exactly the profit she surely wants to realize.

I don’t think it makes sense to compare today’s purchase price with the construction price from 2016. But it might make sense to compare today’s construction price with today’s purchase price: If today I have to pay €3000/sqm for a house whether buying or building, then I can keep my eyes open for a nice plot for a while. I build something smaller because 150 sqm is actually already somewhat large for us and get the better solution for our situation.

Whether my seriousness is questioned because I demand 5% yield is another matter. That comes initially from ignorance. It must also be clear to the landlord that she can get a better price on the market than from us. I think she knows that. Still, she asks us first.
If the realistic rental yield on the market is 3.5%, then 1% more may not be so unrealistic as a good price. 5% can then be a starting point for negotiations. If she then says: sorry, I need every euro, then that is her right and I can totally accept that. Then we consider whether we can and want to raise the money, and if so, there will be a notary appointment. If not, maybe there won’t be. Only then, without us ;D

Do you know who built the terraced house? So if it was one of the big providers, maybe you can google what they currently get for similar projects.

With an architect as far as I know. No general contractor involved.

Not necessarily. What makes it cheaper is the smaller plot. Terraced houses often have a more central location than detached houses.

Well, I would estimate between €480,000 and €550,000. It also depends on whether there are parking spaces, a generous layout or large window areas that make the house look more modern, or whether the attic could still be developed as such. Possibly the immediate infrastructure there is poor or great.
If I looked on Immonet, terraced houses with almost 200 sqm plot and 153 sqm living area start from €560,000 up. But that may be due to location. I don’t know the area.

Basically, everything is quite well planned: there is a parking space, unfortunately not directly at the house, flat roof and 3 full floors with terrace and balcony. Nothing can be expanded anymore.
I also just discovered a comparable new build (semi-detached house) on the other side of town for €700,000: with 160 sqm living area and 216 sqm plot. If you subtract €50,000 for the half-size plot, you arrive at what KarstenausNRW has already calculated for me.

So far so clear. What I don't understand is the following: Why should the money at the bank be just as expensive as the rent?

I think, without reading Karsten's post again, that you can afford financing corresponding to the amount of the cold rent without having to fear not being able to manage the repayment. Nothing more.

Make sure whether you want the house.
That the landlady asks you is decency, exactly the right way and certainly a bit of convenience, at least not a supplication for now, because she does not know how your house will be received on the market.

You can calculate back and forth how much credit you can afford, but just like , I would never name my price before the seller does. She should name her price; either you are lucky and it suits you so that you want to buy the house, or it doesn't fit and then you make your corresponding reasonably calculated counteroffer. I think that at the moment some sellers already know that due to the increased interest rates, the same prices as last year can no longer be achieved. Nevertheless, most are still trying, but I also see quite good chances that as a buyer you might now be able to take on an equivalent role again and the seller no longer automatically holds the stronger position.

One thing is unclear to me, though. Maybe you can give me some guidance here again: You calculate that with €1500 rent at 4% interest, I can get a loan of €450K if I use my rent as interest payments. Together with my fictitious €150K equity, this results in the €600K you calculated for me. So far so clear. What I don't understand is the following: Why should the money at the bank cost the same as the rent? An example: Three years ago, construction interest rates were below one percent. Then, with a rent of €1500 at one percent, I could have taken out a loan of €1.8 million. Plus my equity: Then I would almost have had to pay €2 million for the house so that I wouldn't already be repaying it with the rent at the same time. Or in the other direction: Let's postulate that the ECB raises the key interest rate to 8% within the next 12 months (whether this is realistic is irrelevant here). Then you only get a loan of €225K. Again, with my equity of €150K. Now the house is only worth €375K. A price that was already considered almost ridiculous here. That would be a directly anticorrelated behavior of interest rates and construction / purchase prices. However, the latter have not fallen nearly as much in the last 3 years as interest rates have risen. So if interest rates and prices are not linked: Where does the assumption come from that a reasonable price is created right now if you equate rent with the interest payment for the loan? Where is my thinking error here? I hope I was able to explain this well here. It's not my daily bread.

The "thinking error" stems from the fact that I initially determined a very rough market value based on the land value, the current construction costs, and the depreciation over time. The financing topic is based on your rent, and I only wanted to exclusively show that the financing + 25% equity results in a reasonable relation to the possible purchase price. In fact, the financing is more expensive than the rent. You have to a) contribute €150K equity and give up, for example, 4.5% fixed deposit interest (which is currently available for a 3-5 year investment horizon). The last 5-10 years with insanely (and abnormally) low interest rates made homeownership so cheap that everyone could finance. Prices could not rise as fast as interest rates fell. Now the interest rates have normalized again but are still quite reasonable. However, prices are not falling that quickly yet – obviously, who wants to give up assets/yield. And yes, maybe in mid-2021 there really would have been enough buyers who actually would have paid a seven-digit amount for your little house. With my ex, we built for €550K in 2017. Sold for almost €800K in 2019. In 2022, the neighbor sold the smaller house with a few hundred sqm less land for 1.x million. Why? Because it was simply possible. Those were a few golden years for buyers/builders – of course also for sellers/construction companies. But those times are over. P.S. I have been working in real estate, mainly financing, for almost 30 years – currently also with publicly traded companies. And believe me, with a 5% rental yield you really make yourself ridiculous ;-)

If the realistic rental yield on the market is 3.5%, then 1% more might no longer be so unrealistic as a good price.

That is almost 6.5 years of rent difference (at 4.5% yield) or you are offering about 25% less purchase price than at 3.5% yield. That's how much 1% yield makes. That's worlds apart. Just to have concrete prices in mind - €600K versus €450K. How would you find such an offer as a seller? Maybe €50K below market value. You can play poker with that. But starting at €150K? As others already write. Express your interest and have the purchase price expectation named, so you can make up your mind.

I would also ask for the price and then negotiate. 10% off is usually possible nowadays.