Rising construction interest rates: reversal of interest rates in the German real estate market

Rising construction interest rates: reversal of interest rates in the German real estate market

AThere is a remarkable change in the German property market: for many years, low interest rates have given property prices an additional boost, as the Deutsche Bundesbank has repeatedly pointed out in its monthly reports. Bundesbank experts have warned that this will lead to an exaggeration of real estate prices, especially in large cities. The European Central Bank (ECB) has just announced an increase in key rates for July and September for the first time in eleven years. And even before this step, interest in construction in Germany had increased significantly in a relatively short time: by less than 1% for construction loans with ten-year fixed interest rates at the start of the year. at 3.31% currently. “The last time there was such an extreme upward trend was in 1981,” reports Max Herbst of FMH-Finanzberatung.

More room for negotiation

An exciting question now is whether this rapid rise in interest rates is already being reflected in house price developments. Because if the rise in interest rates makes it impossible for some to buy a house and other forms of investment become more attractive at the same time, this could slow the rise in house prices. Credit broker Dr. Klein, who examines the price development in metropolitan areas in an index on a quarterly basis, comes to the conclusion for the first quarter that no effect is yet observable. This corresponds to the figures of the Association of German Banks from Pfandbrief. Advisors to Dr. Klein, however, report that the market is losing momentum: Here and there it is already possible to trade the price lower. The brokerage platform Europace, which the company claims handles more than 20% of all property finance for private clients in Germany, is currently reporting a somewhat weakened recent price development.

“I would only expect substantial price effects if the interest rate on ten-year construction loans were significantly above 3%,” says Michael Voigtländer, real estate expert at the Institute. German economy. In the past, price developments in the German real estate market had been relatively robust. The upheavals of the corona pandemic had little effect on her – prices continued to rise. In a report released Tuesday by the German Economic Institute for industry association ZIA, however, it says: “There are many indications that the market is now entering a downturn and that a new real estate cycle is heralded.”

Month-to-month changes in property prices should always be treated with caution, as some fluctuations are not uncommon. Nevertheless, in the latest figures from Europace, which are based on actual transactions and not on asking prices, there is a trend that makes you sit up and take notice: In all three segments, new single and two-family homes, houses and condominiums, the increase in prices in May is compared to The previous month was less than 0.5% – it had been very different for a long time. However, it remains to be seen if this will remain the case. On a yearly basis, i.e. relative to May 2021, the rates of price increases are still in the double digits.

First difficulties with older objects

Certain consequences are already being felt on real estate funds: The rating agency Scope has just downgraded six funds – among other things because of the risks linked to the reversal of interest rates. In any case, for the luxury real estate market, the chain of real estate agents Sotheby’s International Realty in Germany reported that the prices of properties from the 1970s to the 1990s were stagnating or even falling. The reasons for this are, on the one hand, rising interest rates and rising inflation. On the other hand, there was a lack of craftsmen and materials, which led to increased costs and at least made the properties to be renovated less attractive. On the other hand, the demand for quality properties that do not require renovation is uninterrupted.

“We assume that prices will remain at a high level overall,” said Mirjam Mohr, a member of the board of directors of real estate broker Interhyp. “However, we believe it is possible that the increase will stabilize from current levels, prices could also decline in certain regions and/or segments – due to the current dynamic situation, however, forecasts are currently subject to to great uncertainty.” In any case, Interhyp does not assume that the rise in construction interest rates in Germany has already peaked. Mohr said: “We currently expect interest rates on ten-year loans from 3.5 to around 4% by the end of the year.”

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