Housing – Buy or Rent?

3.000 EUR rent equivalent per month might be ok for this house. But for an ordinary row house in a suburb of Munich?! (Photo: Provence, France)

3.000 EUR rent equivalent per month might be ok for this house. But for an ordinary row house in a suburb of Munich?! (Photo: Provence, France)

One of the biggest financial decisions in your life will be the potential buying of a house.

Actually, this is a really  severe decision, especially in big cities or other expensive places; a decision than will determine your cash flows, your freedom and even your way of life for decades to come.

Thus it is amazing how blue-eyed most people approach this decisions. At least in Munich, Germany, where Woodpecker’s live, and where real estate prices are sky rocketing currently, the only thought people seem to have is:

How can I quickly get in the market before prices rise even higher?!

Woodpecker kept on observing this for a while now and I speak to as many people as possible who are currently buying houses or are looking for some, and virtually nobody ever put forward real economic arguments, like return on investment, opportunity costs etc.

Instead it is always:
Prices will continue to rise, so we have to join now.
Plus the inevitable:
Real estate is the only asset that will protect me from the coming hyper-inflation.

Real estate markets in Germany have not been booming for a long time, thus Woodpecker has limited experience, but I strongly belief these are signs of a bubble formation.

However, let’s get away from speculating and let’s look at the economics:

Does it pay to buy a house?!

I will not go into deep details of the economics (there an endless tools in the internet for those interested), but start with a more general quick-scan approach – some questions, that, although basic, most potential buyers seem not to consider (at least in Germany today).

First question is your motivation to buy a house.
This question will determine the value the good “living in an own house” has to you.

  1. Is your motivation purely economical on the optimal provision of the good “living in a house”? I.e. your decision is only driven by efficiency: Will you pay more by renting over decades or by buying?
  2. Does your motivation include a speculative element? I.e. apart from receiving the good “living in a house”, you want to speculate on the price changes of your asset “house” (You do that automatically, when you assume “prices will continue to rise”, “my city will continue to boom” etc.!).
  3. Do emotional values play a role for buying a house? Like feeling better or more secure when owning. Do you value very much the freedom to change things at your house, that would be difficult in rental homes? How much is this emotional part worth to you?

Next question is your investment alteratives. This will define your opportunity costs, i.e. the the chances you are forgoing as your money will be tied up in the house.

  1. Do you have an idea where to invest your principal in, if not in a house?
  2. What is the return you’d expect from such an investment?
  3. Does investing and caring for your money (e.g. buying stocks) is fun for you? Or is it a bore and secretly you’d be happy to put all your money in your house, so you don’t have to care about it anymore?

The third question is your expectations of the future. This tells you how the price of your house will develop. (I’d not overrate this bullet though – as the future tends to be a difficult beast to predict ūüėČ ).

  1. Do you really think the price of your house will always go up? Why should it? And why hasn’t prices always gone up in the past? Why do markets crash here or elsewhere? Are you sure you can judge the market and all factors better than those poor guys that messed up in the past or elsewhere?
  2. Do you really know how inflation works and that it will sky-rocket in the future? Do you have arguments for that or are you simply repeating statements that are circulated by others? Could it be the majority is wrong here?

The last question is very important for a downshifter, as it targets at your freedom.

  1. How long will you have to pay down mortgage on your house? How heavy will this burden be? Will it significantly reduce your dimensions of freedom (e.g. rates are so high, you will not be able to reduce working hours or take sabbaticals for the next 20 years or so).
  2. Are you prepared for a shock-event? Are you flexible to handle such an event even with a lot of debt on your shoulders? Shock events could be: You lose your job, you get somehow disabled, you get divorced. Etc. All that things tha can severely distort your mortgage plans and force you to very costly decisions.
  3. Are you ready to settle down here? Or do you want to keep flexibility to move around or experience new areas in your city later?
  4. Do you belief you will be able to sell the house later to consume the proceeds of the sale? If not, you will simply save for your kids – this is noble, but would certainly cut you off from much of the potential returns the house would generate.
    Typical example here: Woodpeckers elderly neighbours.
    They have no kids, but live on a huge ground, that I’d estimate 1.000.000 EUR worth, in a ridiculously huge (but run-down) house of 200+ sqm.At the same time they have to live like poor people because their retirement rents seem low and they are not willing to let go of the house. They could have it all: Travelling, great vacations, services, fantastic food, entertainment or charity for the rest of their lifes, instead they cling to this very run down house and the huge garden, while complaining about all the work it implies. A very irrational decision, but very common too. The price they pay for this “emotional aspect” of their house is virtually 1.000.000 EUR! Are you sure you will not end up like this?


In Woodpeckers case, the decision (at current market prices) goes as follows:

  • The decision on buying a house is to a great extend driven by economics.
  • We do not want to speculate on house prices. Real estate is not an asset class that we know well and I think most of my ideas on its development will be pure speculation or linear extrapolation of the status quo. Thus I’ll assume prices to rise along with general¬† inflation (2,5% p.a.) only, but not outperforming it. Same assumption on development of house rental prices.
  • My asset class is stock trading. I am confident to generate a minimum return of 5% p.a. after taxes. This is confirmed by past trading success and by market statistics, showing that stock markets over the long run yield even around 7% p.a.
  • Thus, I’ll expect a return of 5% p.a. for a house as well. Consequently I’ll take 20 times annual renting costs as a proxy for a “fair” house price. This is a good rule of thumb, there are some deviations to both sides as inflation, interests and change in rental fee, or renovations in the case of owning, but in general this factor has proven to work fine.
    The renting cost to be applied is the “cold rent”, as it is called in Germany, thus the rent before additional costs (insurance, utilities, taxes, heating), as the latter will have to be paid even if you own the house.
  • Woodpecker family’s current “cold rent” is 1.650 EUR p.month or 19.800 EUR per year for a 150 sqm house + garage + small garden.
  • If buying we want something similar or larger, thus a fair price for a similar house would be 19.800*20 = 396.000 EUR. Subtract around 10% of broker, tax, moving costs, this yields a house price before costs of 356.400 EUR.
  • Emotional value is existent, I’d value it at 2.000 EUR a year (…or even less, if you think about it in this way…), so let’s add 2.000*20 to the fair house price: 396.400 EUR.
  • For shock events, I’d like to subtract 10%, as cash or a liquid stock portfolio will be more flexible in those cases. And I’ll subtract another 10% as freedom and flexibility (e.g. to reduce working hours, or to take sabbaticals, or to move somewhere else) are very important to us, and much easier achieved if you have a fair amount of liquidity.
  • On the other side, I’ll add +20% to the fair price for potential security in an inflation scenario (although stocks should do ok in this case as well) and for securing against rental fee increases and potential hassles from having to leave the rental house.
  • Over all, fair price comes in at roughly 400.000 EUR (before tax and broker).

4-5 years ago, this would indeed have been an somehow achievable price in Munich for Woodpeckers type of used house.

Today, prices unfortunately are way off, probably around 500.000 EUR for our size and location of a 20-year-old house and around 650.000 EUR for a similar new built house in the neighbourhood sold to a colleague 3 months ago (and his was a row house only).

Translating this example of a new built house back to monthly cold rent, we would end at (650.000+10% broker+tax)/20/12= 2.980 EUR per month!!!

And would you pay an equivalent of nearly 3.000 EUR per month for a 150 sqm row house in a Munich suburb?

Well thanks, we would rather not, so we will continue to rent our house and maybe recalculate in case prices come down…



Saving: Be a Latecomer not an Early Adaptor!

Don't be a donkey by spending your precious money on fashion items! (seen in Barcelona, Spain)

Don’t be a donkey by spending your precious money on fashion items! (seen in Barcelona, Spain)

Finally, a new post on money and saving.

Today we will learn how to safe 1.200 EUR per year.


I mean, much of this topic has been covered already, but there is one more thing people systematically seem to do wrong about consumption:

People always want to have the newest and coolest stuff.

I guess, to some degree this is understandable – man, who does not want to be cool?!

Unfortunately, being cool by buying “sexy” stuff comes at an incredibly high price, a price that is likely to severely slow down your downshifting plans.

So the real question is:

Do you really want to be cool on the price of slaving away in your job an ugly 40 hours/week, 46 weeks/year?!

Or should you try to get your coolness from something else than from new “gadgets”.

But lets look at some background first:

The principle of “inter-temporal competition” is very well-known in economic theory.
Intertemporal competition means, that besides “normal” competition (against other products/companies), each product today is competing against sales of itself in the future. That means, if you try to sell a product (lets say a smart-phone), it normally will get cheaper in the future. As people know that, some tend to wait, decreasing demand today.
On the other hand, each company wants to make profit rather today than tomorrow. This especially holds true in today’s short-lived, impatient business climate, where all people and investors seem to care about is the next business quarter.

So what will companies do to fight intertemporal competition?

They will try to add value to the today purchase of the product by trying to convince you – the consumer – that a purchase today is better than a purchase tomorrow.

How do they convince you to buy at a high price today instead of waiting until tomorrow?

1) Well, one thing is ever-changing technology.
Companies will try to tell you what there offer is so ground-braking that you really have to own it today.

This is what I call the “Weisser Riese” Effect in German, as I came to realize this phenomenon 15 years ago on the example of a washing powder called “weisser Riese” (“white giant”). Advertisement for “weisser riese” went that way: This washing powder is so sophisticated that it creates the most white color for your shirts that is ever possible.
Wow, ok, fantastic, you guys convinced me, I’ll have to buy it !! It’s more costly, but if it is that great…!
But then, one year later, there was a new version of “weisser Riese” out there, with a refined formula, and even much better results. And one year later this thing came in mega-perls, providing still much better results due to what-god-knows great progresses in chemicals. And so on.But, you see the point:If the first product was already perfect, how does it come that they can improve it every year?! Either there was no improvement, or the first product was far from good in the first place.

2) Second method it to creat a fashion.
Telling you that you will be so un-cool if you do not keep up and join in today.

Both 1) + 2) are mostly achieved by the means of advertisement.

This is one major point why you should get rid of your TV.
Because if you like it or not, there is ample evidence that advertisement will affect you on a subconscious level, even if you think you are able to ignore it.

Actually, bullet 2, fashion, is the thing that seems to work best in todays consumption driven world, and in a world where many people lack meaning in their lives, and thus tend to define themselves by appearance, status, the things they wear and own, etc.

Thus, you will see the wheel of fashion spin quicker and quicker, and expanding to product categories that where not as prone to fashion 30 years ago.
Like kitchen tools, furniture, you name it.
With this there also comes a shorter durability of products and less products available featuring an unspectacular or ageless design.

Now let’s have a look at how this affects your budget.

My claim is, that an average household in Germany (total spending on consumption 2.245 EUR per month, see here), can safe up to 1.000 EUR per year by simply switching to a “late-comer” consumption style, i.e. without buying less, but by consequently buying products that are already a bit out of fashion.

Let me show you some examples I observed over an extended period of time:

  • TV, Toshiba, flat screen, 26”, at time of market entry in March 2012: 400 EUR.One year later: 220 EUR (-40%).
  • Smartphone, Samsung, at time of market entry Feb 2012: 300 EUR.
    Today, 1,5 years later: 130 EUR (-60%).
  • Computer Game, at time of market entry: 40 EUR.
    1 year later: 25 EUR (-35%).
  • New Car, at time of market entry: 24.000 EUR.
    3 years later: New car, same edition, around 20.000 EUR (-15%).
  • Jacket, well-known brand, market entry Autumn 2012: 250 EUR.
    3 months later, winter sale Jan 2013: 150 EUR (-40%).
  • Carver Ski Set, at market entry: 250 EUR.
    1 year later: 199 EUR (-20%).
  • Computer, high-end machine, state of the art, including monitor, at market entry: 2000 EUR.
    1 year later, same specification: 1300 EUR.(-30%)
    2 years later, same specification: 1000 EUR (-50%).
  • Semi-professional Camera, body only, at market entry: 800 EUR.
    3 years later: 600 EUR (-25%).
  • Movie DVD rental, at market entry: 3,50 EUR.
    2 months later: 2,50 EUR (-30%).

And so on.

Now lets look at total average household spending:

  Av. Spending p.month Saving by Late Coming Total Saving p.year.
Cloths 106 EUR -25% 318 EUR
Household Equipment 113 EUR -20% 271 EUR
Vehicle purchase / maintenance (estimate) 150 EUR -10% 180 EUR
Electronics / Telcom 65 EUR -30% 234 EUR
Entertainment, other 200 EUR -10% 240 EUR
Total     1.243 EUR

Voila, there you go:

Potential savings of 1.243 EUR per year!

And that is without having to surrender anything, but just by running a bit behind the herd.
This is what I like: Gains by pure efficiency, without having to giving up on anything!

Plus there are some additional benefits of late coming:

  • The herd will already have found out for you if the product is of high quality or not
  • You have enough time to ponder out if you really need that product at all, or if it was an affect made you belief you need it.
  • Used items will be available by then, opening the possibility to save even more.

The only minus is:

You will not be able to boast around with your new gadget!

But hey, more than 1.200 EUR per year only for boasting?
That’s 12.000 EUR in 10 years, and 72.000 EUR in 60 years!
A small fortune!

Well, not with me…

Decide yourself!



Some Guidelines to successful Investing

Investments returns can help building the bridge to better downshifting. (Galata bridge, Istanbul)

Investment returns can help building the bridge to better downshifting. (Galata bridge, Istanbul)

Obviously, downshifting is much easier if you have a solid financial background and if your savings are working for you in a way as efficient as possible.

I am frequently asked what my investment strategy is, so I will put together some general ideas in this post. I will however not make specific recommendations on markets or products, as in the end everybody is responsible to make their own decisions and bear the consequences.

I am not a financial adviser. The ideas presented are my private opinion and no general recommendation. Everyone has to do his/her own research, make his/her own decision and bear the consequences.

Let me start with some first and very important advise:

1) There is no such thing as a golden bullet to become rich in an easy and risk free way by investing in a “magic” product

Sounds obvious? Well, maybe. But after investing in financial markets for over 15 years now, I learned that many people basically are still looking for this magic bullet, and most investors still think it is out there.
Whenever somebody says, “the market went so deep, it cannot go deeper” or “Real estate is a save play, there will always be demand” or “gold was important throughout human history, so buying it is a safe bet”, then actually he is advertising the magic bullet.
Do not believe talks like that. Investment is hard work if you want to beat the market.

In economics there is a saying there is no such thing as a free lunch. That means when something sounds very attractive, there WILL be a risk or hidden caveat attached to it.

A bank pays high interest on your savings? Well, maybe they are in risk of getting insolvent in which case much of your money will be lost.

A stock pays a great dividend? Well maybe they are paying it from their substance, thus neglecting growth or sustainability and despite the high dividend, valuation of that stock will go down, causing losses to you.

I will admit that actually there are a few and quite limited “free lunches” out there from time to time, but it takes a lot of time and knowledge to find those – you’ll not find them in a financial newspaper advertisements. And do not forget that other clever people are out there as well. Thus my second advise:

2) Be humble. Always assume that there is a lot of players out there that are smarter than you.

Whenever you found a great investment, be sceptical. And scrutinize if maybe this is a trap layed out for you by a really smart professional. Always diversify and never bet with too high stakes or with leverage or lended money.

3) Be very sensitive about costs

This is important! Most investors seem to neglect cost when doing their decisions. And I did as well when I started in the stock market.

However, one example shows how important costs are:

Let’s assume you invest 10.000 EUR in an ETF, and returns will be 6% per year.
Now we look at two alternatives, the first has a management cost of 2% per year, the second is a passive product with costs of 0,5% per year.

Guess what the total return is after 20 years?

  Inv. A Inv. B
Capital at Start 10.000 10.000
Return (p.a.) 6% 6%
Cost (p.a.) 2% 0,5%
Capital after 20yrs 21.911 29.177
Return (total in EUR) 11.911 19.177
Return (total in %) 119% 191%
Return (last year in EUR) 876 EUR 1604 EUR

For the first ETF, it is a surplus of 11.911 EUR. Very nice, 119% over 20 years.

But for the second ETF however, it is 19.177 EUR or 191% over 20 years!

That means, the difference in costs almost doubled your future income from that investment in the second case.

And look at the income stream that will be generated after 20 yrs from the both alternatives: The annual income of the low-cost alternative will be almost double the income of the high-cost alternative.

So, always bear costs in mind and ask yourself if high costs are necessary and justified.

4) Don’t overestimate tax-optimization

If you like it or not, you will have to pay taxes on most investment returns. Obviously, everybody would like to avoid that, but be careful: Tax-avoiding strategies often lead to ill decisions. Financial industries are happy to market products that are “tax-efficient” as many customers seem to become blind to the quality of the product as soon as they hear the word “tax saving”. This was shown in many economic studies.

5) Check the performance of your investments not too frequently

This is about happiness.

Checking too often will make you compare to others (or the market) all the time. Problem is, that comparing to others as well as thinking too much about money are both proven to have a negative effect on happiness. And it leads to hectic decisions, at least in my experience. So I tend to thoroughly choose a strategy, buy stocks, and….wait.
Especially in the first months after a purchase you might not want to look at your stocks at all. If they are flourishing you might get too overconfident, if they are diving you might be tempted to revise your strategy and sell them in an affect.

6) You might prefer real investments (“tangible assets”) over nominal investments.

A nominal investment would be a savings account, or a bond. Both entitles you to a payment by a second party (the bank or the bond issuer) whereas with a “real” investment you actually own something physical, like a part of a company, a patch of land, a piece of gold, you name it.
Real investments are more immune to inflation, less prone to haircuts or insolvency or financial repressions. See this post.

However, price still matters. Never buy an asset blindly just because you are afraid of loosing your cash in one of the many crisis.

7) Buy anti-cyclical

You think modern markets are developed, stable and rational? Far from stupid emotions and stupid behavior?
Well, they are not. I’d even say that modern markets are more prone to irrational herding behavior than 20 years ago, due to the high pace information is traveling with and action can be taken.
Thus markets frequently over- and under-shoot their fair value in highly emotional rushes.
Train yourself to sit on the other side as often as possible.
Everybody is buying real-estate/tech-stocks/old-timers?! Be careful.
Everybody says real estate/stocks/a certain country is doomed!? Consider buying. Don’t buy blindly though, but give it a thought if the market might have overreacted in that particular situation, giving you a chance for a bargain.

However, with anticyclical investments, you need patience and some stamina to withstand initial losses. Judge carefully how much downside you are willing to take (in most cases losses hurt more in reality than you might think beforehand).

8) Have fun in what you are doing

I think this is very important. You hate reading company earnings reports, plugging through balance-sheets and compare different valuation measures? Then better turn away from stock picking as the public information will simply not be sufficient to make a superior pick. I’d stay away from stock picking but rather go for passive (costs!) ETFs (fully stock backed ETFs are real values; note that certificates or options are not!).

You have no idea of different housing qualities, standards, price comparison etc. and have no fun in reading into these things? Then it might be difficult to make a bargain at the real estate market…

9) Learn about the psychology of investment

You think you have yourself fully under control and are taking you decisions in a rational way?
Well, most likely you will not. On top you might not even know where your emotions are steering your decisions.
So it’s a good start to understand common psychological investment traps as outlined e.g. in the two links below:

Presentation on Behavioral Finance

Overview of common behavioral investor mistakes

10) Money is not everything

In any case you have to accept volatility as a part of the game. It is a long and tough way to learn to really cope with e.g. 30% of your wealth being destroyed in a market crash. Be prepared that you will suffer on this way.

But always remember: Life is a game, and so is investing. It is only money!

…and as a good downshifter, you never made your happiness depend solely on money, and you know that money is a means only and never the goal.

OK, so that were general advises, but what now about Woodpeckers strategy?

Well, as said, this is my personal decision, so I do NOT say it fits everybody else’s risk appetite, financial profile etc.For the reasons stated above, Woodpecker strictly sticks to investing in “tangible assets”. I am however not good at evaluating real estate. Plus it is illiquid and difficult to diversify. Thus Woodpecker is invested almost 100% in stocks, and always was. For me it is great to own parts of companies that I belief in, plus the stock market grants decent returns in the long run, about 7% p.a. is the historical mean (Siegel’s constant). And – this is important – I find it quite some fun digging for undervalued stocks and markets.

I do stock picking and am mostly invested in German small caps (companies I know or can understand, plus often so small that they are not covered by institutional investors), a couple of stocks of southern Europe (I think there are some bargains here these days – however be careful, this is a tough and partly dangerous market) and some stocks in UK and eastern Europe. I avoid US stocks, as they are said to be slightly overpriced my many common metrics plus they add currency risk to my portfolio that I don’t like. Sometimes I do buy ETFs or certificates (careful! certificates include counter-party risk) of specific foreign markets where I see potential but have no means to pick individual stocks.


I’ll say it a third time: Don’t follow anyone blindly (including me), but find your own strategy! But equally important: Start finding your strategy now!

Investment can bring a real boost to your downshifting progress, even if it is humble and careful and passive …



ps. Excellent Investment Blog and with very good blog-roll: http://valueandopportunity.com/

How much consumption is really optimal?

Holidays creats a lot of satisfaction for Woodpeckers, so we spend a lot for them. But that might be different for you.

Travelling creates a lot of satisfaction for Woodpeckers, so we spend a lot on it. But that might be different for you. Photo: Périgord, France.

Hi there and a happy festive season (guess that’s the political correct expression for merry christmas, isn’t it?)!

Well, at least in Germany the consumerist part of Christmas is over (presents are exchanged on 25th of December), so it’s a good time to reflect a bit on consumption in general.

I guess concerning this issue there are two major opposing groups when I look around:

1) The more-and-more attitude

i.e. the materialistically driven group that is striving to maximize consumption ever more.
Consumption, materialistic gains, and all that belongs to it (like career, political focus on efficiency, perfectly trimmed CVs, status and it’s symbols) plays a major role for them. To different degrees they are consciously or unconsciously sacrificing many non-material pleasures in life (like social contact, idle-time, hobbies, travelling, chilling, creative work, benevolence) for the main purpose: “Getting ahead” and “achieving something”.
Whereas it seems to be pretty thinly defined what exactly the purpose of this “achievement” is in the end. Continue reading

Interesting Facts from Happiness Research – Part One: Income, Growth and Work

As there are many U.S. readers around, in addition to German happiness distribution, here the picture for the U.S. (click to enlarge)

Today, some more scientific facts on happiness:

Here  is a very good introduction to this field of research for those of you who want to know more detail:

The World Happiness Report

(all quotes below are from this study)

Let’s start with the most central argument for the downshifter-community:

Money / Materialism

…or more specifically: More money does not necessarily mean more happiness.

Continue reading

The income and consumption illusion – Part 1: More and more will NOT make you happier!

Ever increasing happiness by ever increasing income and consumption is as much an illusion as this one…

One of the most stunning findings of happiness economics is the effect of adaptation.

It basically says, that from a certain point on you will quickly adapt to

(a)    Changes in your income/wealth

(b)   The possession of new stuff

Basically, common sense should already have told you that this effect is at work, but the credit of happiness economics is that this effect was statistically verified and even quantified by extensive field studies and experiments (check this post for more and for sources).

Continue reading

The Welfare Paradox

Trips like this eat away lots of the work efficiency gains made since 50 years ago. On the other side, they can be great fun. You might try the middle way: Live general frugally but allow for occasional punctual luxury (whatever is luxury for you) every now or then within pre-set budget planning. (picture taken on the isle of Teneriffe, Spain).

When thinking about downshifting, saving and frugal living, one often encounters what I call the ‚Äěwelfare paradox‚ÄĚ:

Whereas there is ample proof that your relative earnings are much higher today than that of your ancestors, meaning it will take you much less time of work to earn the money for almost any given good  (see here), average working hours do not decrease that significantly.

Continue reading