Opportunity costs

Opportunity costs when buying property

When buying property, opportunity costs are often less obvious but play a central role in the decision-making process. Here are some examples that illustrate the importance of opportunity costs in the property market:

Example 1: Purchase of a property vs. other investments

Let's say you have €500,000 and are considering investing it in a property. The opportunity cost of this decision is the potential profit you could have made with an alternative investment, such as shares, bonds or other property. For example, if the shares yield an annual return of 8% and the property only 5%, then the opportunity cost is 3%.

Example 2: Timing of the purchase

Imagine you are considering whether to buy a property now or wait a year in the hope that prices will fall or interest rates will drop. If you decide to wait, the opportunity cost could be the rent you continue to pay instead of investing in your own property. In addition, potentially rising property prices or falling interest rates could change the situation, further complicating the opportunity cost calculation.

Example 3: Choice of property

You have the choice between two properties: a flat in the city and a house on the outskirts. If you decide in favour of the city flat, the opportunity costs are the advantages that the house on the outskirts offers, such as more space and peace and quiet. Conversely, the opportunity costs of buying the house are the advantages of the city flat, such as shorter commutes and better infrastructure.

Example 4: Utilisation of equity

If you invest equity in the purchase of a property, the opportunity cost could be the lost interest gain that you would have received if you had invested the equity in a safe investment product such as fixed-term deposits or government bonds. In addition, the equity could also be used for other investment opportunities that may offer higher returns.