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Building interest: Is the trend reversal on the real estate market coming now?

For citizens who finally wanted to fulfill their dream of owning their own home this year, the news situation of the past few months was almost unbearable. Real estate prices continued to rise inexorably and were not stopped by the corona pandemic, war, inflation and fears of a European recession. In the first quarter of 2022, residential real estate cost a whopping 12 percent more than in the same period last year. This means that prices have risen at a double-digit percentage rate for the fourth quarter in a row. At the same time, the cost of real estate loans exploded: Between January and June, building interest rose from around 0.8 to well over 3 percent, which means an immense burden for debtors.

Relaxation is evident

Anyone who took out a ten-year real estate loan of 400,000 euros with an interest rate of 0.8 percent and an initial repayment of 2 percent at the beginning of 2022 would have to pay 933 euros a month, the comparison portal Check24 recently calculated. If the same loan was taken out in June, it was already 1667 euros per month. For young families and average earners, who are already suffering greatly from the consequences of inflation, the dream of owning their own four walls has become a distant dream.

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But the time of such horror reports could slowly come to an end. Because there are signs of a relaxation in both property prices and building interest rates. For one thing, real estate prices are slowly falling. This is mainly due to the sharp rise in construction interest rates. Hard numbers are still missing, but brokers are already reporting that more and more financing has not come about in recent months due to the explosion in interest rates. As a result, deals that had already been considered closed fell through and sellers were forced to reduce their price expectations.

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“We see that prices are indeed starting to fall”

The first figures from the “Immowelt” portal also indicate falling prices on the market: In half of all major German cities with more than 500,000 inhabitants, the prices for existing apartments stagnated or fell in the second quarter of 2022, for example by around 1 percent in Düsseldorf, Munich and Leipzig and even by 2 percent in Hanover. On this basis, Immowelt experts are already forecasting the end of the real estate boom in Germany.

Thomas Schroeter, head of the real estate portal “ImmoScout24”, claims to have observed an even sharper drop in prices in the metropolises: “We see that prices are actually starting to fall,” said Schroeter. “Berlin is relatively stable, but in Düsseldorf, Hamburg, Cologne, Munich and Stuttgart we see price declines of up to five percent, depending on the metropolis.”

Interest rates are falling again

The interest rates are also looking a little better again. Even before the European Central Bank (ECB) raised interest rates at the end of July, interest rates for ten-year home loans had fallen noticeably, observed the Munich-based credit broker Interhyp. They were most recently at around 3 percent after a good 3.4 percent at the top. “At the moment the trend in construction interest is falling,” said Max Herbst, founder of FMH financial advice. There is a short-term dip, the uptrend is broken. Most recently, Herbst still thought building rates of 4 percent possible after the summer break. Now the question arises how to proceed.

Could mortgage interest rates go down permanently? The possibility is definitely there. Because the reason for the rise in construction interest rates since the beginning of the year was the high inflation, which puts the central banks under pressure to raise the key interest rate. However, the key interest rate only has an indirect influence on construction interest rates: the latter are based on the yields on ten-year Bunds, which shot up in anticipation of a more restrictive monetary policy from the ECB. We have explained the background to this here. Now one might think that the European currency watchdogs will have to tighten their monetary policy permanently because inflation will probably level off at a higher level. So the interest rates would have to stagnate at a high level.

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Italy’s government crisis is affecting German construction interest rates

The line of thought is absolutely correct. At this point, however, an opposing factor comes into play: with a more restrictive monetary policy, government debt becomes more expensive due to higher interest rates. This increases the probability of default by the particularly heavily indebted countries in the euro area. Your bonds are therefore riskier, which is why investors flee to safer paper, such as government bonds. This in turn causes the price of the ten-year federal bond to rise and its yield to fall – which ultimately leads to falling construction interest rates.

This long chain of possible events shows how complicated and fragile the situation is. In the course of raising its key interest rate, the ECB announced that it would intervene by buying bonds if necessary, should the interest rates on the securities of potential bankrupt states rise disproportionately. Italy in particular is in focus in this respect, since, in addition to increasing debt and stagnating economic growth, it is also currently being hit by a government crisis, the outcome of which is not foreseeable.

As a result, forecasts for the development of German construction interest rates are currently subject to many question marks. The consolation for those interested in real estate: Due to the high national debt in the euro zone, including in Germany, the medium-term trend in interest rates should tend to point downwards again.

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