Central banks are raising interest rates across the board. For homebuyers, the dream of owning their own four walls is becoming ever more distant. And even if the real estate market is turning, buyers shouldn’t get too hopeful of rapidly falling prices.
The US Federal Reserve did it, the Bank of England and now the ECB: Central bankers around the world are raising interest rates in the fight against inflation. As expected, the monetary authorities raised the key interest rate in the euro area by 0.5 percent to 3 percent on Thursday. And that’s not the end: A further jump of 0.5 percent is almost certain at the next meeting in March.
The IFO Institute expects the key interest rate to be 4 percent by summer at the latest. This threshold has been reached in Great Britain since this week and has even been exceeded in the USA: Here the Fed has even raised the interest rate to 4.5 to 4.75 percent.
For homeowners – and those who want to become one – the world has turned 180 degrees in less than a year. For potential real estate buyers, the explosion in interest rates, horrendous inflation, the high purchase price level and rising construction costs mix into a bitter cocktail.
The market for home loans, which is based on the interest rate for ten-year federal bonds and therefore reacts to the key interest rate with a delay, was turned upside down in just a few months. According to the financing broker Interhyp, the rate for ten-year mortgages was around 1 percent at the beginning of 2022, but 3.6 percent are now due.
And with the expected further rate hikes by the central bankers, things should continue to rise. “We currently see our forecast of an interest rate corridor of between 3 and 4 percent for building interest confirmed,” says Mirjam Mohr, Interhyp’s private customer board member. The sad news for prospective homebuyers: you will be less and less able to afford the financing.
Actually, therefore, the purchase prices for houses and apartments should fall in the medium term. Because falling demand is dampening the sums that providers can demand and enforce for their properties. There have been signs of this since last year. Demand for new home loans has drastically reduced. In some cities, prices have fallen slightly or are stagnating.
But times are anything but normal. A number of opposing factors argue against real estate prices falling too quickly. “The real estate market has come to an emergency stop in many parts of Germany. But we will not see a nationwide price slide in 2023,” says Michael Neumann, head of the financial broker Dr. Small.
Above all, there is historically high inflation: it is driving investors into real assets. “For well-funded households, a psychological effect in the face of high inflation – the flight to concrete gold – could lead to additional demand for real estate,” says Bundesbank board member Joachim Würmeling. Even if interest rates explode, houses will continue to be bought and built. Only by people who can still afford it. And less of Otto normal earners. Even for high earners, they are hardly affordable, as a DIW study recently showed.
Not only the rising interest rates, but also the shortage of materials and delivery bottlenecks are causing construction costs to explode and dampening new construction. Germany’s largest real estate group Vonovia has therefore already stopped all new construction projects this year. Construction Minister Klara Geywitz has already said goodbye to her already ambitious goal of 400,000 new apartments per year for the past and current year. The goal for 2024 and 2025 must be “to get to this number”.
The housing shortage in major German cities is therefore likely to get worse. And where the supply goes down, the prices usually go up – or at least don’t go down. Even if the financing costs explode. “A sustained drop in prices is not to be expected. In the medium term, we expect a shortage of supply, which can turn the market around again,” says Gesa Crockford, Managing Director of ImmoScout24. “Compared to the price increase of the last five years, the price correction can be classified as moderate.”
There is also another fundamental factor: despite a few bubbles, the high sales prices in many locations are fundamentally justified. Immigration continues, for the first time Germany has more than 84 million inhabitants. And more and more people are moving to the big cities or to the suburbs. As a result, real estate prices there remain high no matter what interest rates are.
But the longer the interest rate explosion lasts, the greater the chance of falling house prices. Because rising interest rates are a problem for everyone who needs follow-up financing. As long as the interest rate on the new loan stays around the same as before, they can continue to bear the burden. It only becomes critical when the new interest rate is significantly higher – then the financing becomes more expensive all of a sudden.
The potential for foreclosures – and thus falling prices – may not materialize for a few years. “In 2013 we still had interest rate levels that aren’t that far off from today. Those who took out a ten-year mortgage that is due can still cope well,” says portfolio manager Andreas Beck. “It will be interesting in 2015 and 2016. Anyone who took out a ten-year mortgage did so for less than one percent. If they now have to refinance at four or five percent, then many won’t be able to do it.”
