How is the German housing market doing? In my second take on this question, I compare rent to purchase prices for apartments in Germany.

A common measure of valuation, the buy-to-annual rent ratio relates purchase price to annual rent (excluding utilities) for comparable apartments, that is, ideally, apartments of the same size, amenities and location. From an investor's perspective, the ratio answers the question: How many years does it take until my investment is amortized (excluding issues of taxation, maintenance, …), keeping rent fixed?

To compute the price-to-rent ratio, I group apartments by city and size and compute the mean purchase prices and annual rent in each group. I keep only groups with at least 10 apartments listed for rent and 10 apartments listed for purchase. The mean price-to-rent ratio is about 25.

A first result, illustrated in the figure below, is that the price-to-rent ratio increases in apartment size, so it seems that it is relatively better to rent rather than to buy larger apartments right now (unless purchase and rental listings differ more in other characteristics for larger apartments than for smaller ones).

How do the big cities do? To illustrate, I focus on apartments with living space between 80 and 110 square meters. Munich and Frankfurt are about on par with price-to-rent ratios above 30, while buying seems relatively more attractive in Hamburg or Cologne.

##                City medianPriceToRent
## 1           München             32.62
## 2 Frankfurt am Main             31.09
## 3            Berlin             28.01
## 4           Hamburg             26.92
## 5              Köln             25.95
## 6         Stuttgart             22.11

Where are price-to-rent ratios highest? Perhaps surprisingly, the top 10 miss a few big cities and include a few unexpected ones (Rostock, Solingen?). In each of these cities, one can buy an apartment for the equivalent of 30 years of rent (without purchase fees, maintenance and such). To put these values in perspective, note that they are about on par with average price-to-rent ratios in cities such as Los Angeles, Seattle or Boston (see here).

##             City medianPriceToRent
## 1         Lübeck             38.94
## 2       Landshut             36.80
## 3        Rostock             36.43
## 4  Halle (Saale)             36.01
## 5       Erlangen             35.42
## 6     Ingolstadt             33.00
## 7        München             32.62
## 8       Solingen             32.56
## 9         Coburg             31.42
## 10       Leipzig             31.27

To provide more context, it would be nice to compare these values to historical price-to-rent ratios in Germany, data that I don't have. Overall, it seems fair to say, though, that buying does not seem like an attractive investment in many places as yields are very poor. Of course, buying comes with other non-monetary utility and benefits which might still make buying a good choice for some.