- The video shows how rising interest rates on construction money affect real estate profitability.
Anyone who wanted to sell their house or apartment in 2023 has thought at least twice: spoiled by the previous years, sellers had to realize that the era of record prices was over.
On the contrary, buyers were hesitant: interest rates had skyrocketed to levels they had not expected months earlier and real estate prices were falling. No one knew how long, but it seemed like the wait for even lower purchase prices would be worth it.
Experts suspect that prices have reached their lowest level
Not anymore. Based on sales and price figures and looking at interest rate trends, most real estate analysts now believe prices have bottomed out. Things could start to improve again in 2024. If you want to buy, you should do it now is the general recommendation, but it has the drawback that it usually comes from those who somehow benefit from a market revival.
The financiers of the construction of “Dr. Small” are included. They are currently outlining three factors that they believe are causing the market to rebound again.
1. Interest rates are probably past their peak
Due to falling inflation rates and inflation expectations, the European Central Bank has not yet announced any further increase in official interest rates. Capital market interest rates, which are based on a federal bond with a 10-year term, have fallen from a high of nearly 3 percent in early October to the current 2.6 percent.
2. Construction frosts and bankruptcies limit supply
The latest news on ongoing construction projects shows the expected development: in the face of rising interest rates and falling prices, real estate developers are encountering difficulties and have to stop their projects. Some are ruined. The market reacts and regulates as it should: the fall in the supply of space affects rents and prices. They could rise again. This is especially visible in the case of rents: according to the Federal Statistical Office, they increased by more than six percent between 2020 and 2023.
3. Mood goes up
Although the mood in the German real estate market remains murky in terms of level, a ray of hope has recently appeared due to the above. The real estate climate is rising again. What is measured is the investment and profit climate, that is, the buying and selling side. The construction finance company Deutsche Hypo regularly surveys 1,200 experts on this topic. And everyone was more optimistic in January than the previous month. His mood has already improved since November. The index is currently 1.9 percent higher than 72.3 points at the end of last year. However, only from a value of 100 can we really speak of optimism.
What construction financiers like “Dr. Perhaps we still crave small, but the trend can already be seen on real estate portals. According to a recent announcement by the real estate portal ImmoScout24, the purchasing market is experiencing a new boom. After a year characterized by moderation, the ImmoScout24 Wohn barometer for the fourth quarter of 2023 shows a clear upward trend in sales prices in the new construction sector. The trend is also positive for existing properties. There are only occasional price discounts. Demand for existing condominiums is increasing significantly across the country. ImmoScout24's explanation is as follows: “Given the reduction in the inflation rate and the situation of more stable interest rates, a certain security is increasingly recovered in planning and, therefore, in purchasing demand. For many, the dream of owning their own home is getting closer. There is still excess supply on the market. However, this will begin to decline in the second half of the year as demand increases. “It cannot be assumed that prices will fall again as noticeably as in the second half of 2022.”
Price comparator McMakler also reports: In January, interest rates for construction financing with a ten-year fixed interest rate fell to 3.4 percent, a decrease of around 0.4 percentage points compared with the previous month. The comparative construction finance portal vergleich.de now even mentions interest rates below three percent, which are available for a loan of 320,000 euros with a ten-year term and a two percent repayment. This evolution, writes McMakler, is reflected in the demand for residential real estate, which increased by 4.5 percent in the fourth quarter of 2023. In addition, in the same quarter the real estate market recorded a nominal increase in purchase prices compared to the previous quarter for the first time since the second quarter of 2022. Specifically, McMakler statisticians state: “While purchase prices for houses continue to fall by 0.2 percent, apartments recorded a price increase of 1. 2 percent.”
Finance Minister Lindner could jeopardize recovery
However, banks believe that the possible recovery of the real estate market could be slowed if Federal Finance Minister Christian Lindner (FDP) implements a law that is currently in the draft phase. The German banking industry (DK), the association that brings together banks in this country, is concerned about new obstacles that could make it difficult to buy and build residential properties in Germany. According to the Handelsblatt, in a letter to Lindner, the DK criticized a proposed law that would allow financial regulator BaFin to introduce income limits when granting loans for residential properties. “We consider this to be the wrong political signal at a time when around 700,000 apartments are missing, new housing construction is almost paralyzed and residential property loan commitments made since the beginning of the year are approximately 40 percent down. below the level of the previous year,” writes the association.
On the recommendation of the Financial Stability Committee, the federal government plans to introduce income-based instruments in real estate financing. This may allow BaFin to limit the ratio of total debt to income on real estate loans for new borrowers. The instruments can also limit the ratio between monthly loan payments and income, a plan that would at least make it more difficult for banks to make loans.