AThere is a remarkable change in the German real estate market: For many years, the low interest rates have given real estate prices an additional boost, as the Deutsche Bundesbank has repeatedly pointed out in its monthly reports. The Bundesbank experts warned that this would lead to exaggerations in house prices, especially in large cities. The European Central Bank (ECB) has now announced an increase in key interest rates for July and September for the first time in eleven years. And even before this step, building interest in Germany had risen noticeably in a comparatively short time: from less than one percent for building loans with a ten-year fixed interest rate at the turn of the year to currently 3.31 percent. “The last time there was such an extreme upward trend was in 1981,” reports Max Herbst from FMH-Finanzberatung.
More room for negotiation
An exciting question now is whether this rapid increase in interest rates is already reflected in the development of real estate prices. Because if higher interest rates make it impossible for some to buy a house and other forms of investment become more attractive at the same time, this could slow down the rise in real estate prices. The credit broker Dr. Klein, who examines the price development in metropolitan regions in an index on a quarterly basis, comes to the conclusion for the first quarter that no effects can yet be observed. This corresponds to figures from the Association of German Pfandbrief Banks. The advisors of Dr. However, Klein reports that the market is losing momentum: Here and there it is already possible to negotiate the price down. The brokerage platform Europace, which, according to the company, handles more than 20 percent of all real estate financing for private customers in Germany, is currently reporting on a recent somewhat weakened price development.
“I would only expect substantial effects on prices if the interest rate for building loans with a term of ten years was significantly more than 3 percent,” says Michael Voigtländer, real estate expert at the German Economic Institute. In the past, the price development on the German real estate market had proven to be relatively robust. The upheavals of the corona pandemic had little effect on her – prices continued to rise. In a report published on Tuesday by the German Economic Institute for the ZIA industry association, however, it says: “There are many indications that the market is now entering a downturn phase and that a new real estate cycle is being heralded.”
Month-to-month changes in real estate prices should always be treated with some caution, as certain fluctuations are not uncommon. Nevertheless, in the latest figures from Europace, which are based on actual transactions and not on asking prices, a trend can be observed that makes you sit up and take notice: In all three segments, new single- and two-family houses, existing houses and condominiums, the price increase in May is compared to the The previous month was less than 0.5 percent – that had been very different for a long time. However, it remains to be seen whether this will remain the case. On an annual basis, i.e. compared to May 2021, the price increase rates are still in double digits.
First difficulties with older objects
Certain consequences can already be felt with real estate funds: The rating agency Scope has just downgraded six funds – among other things because of risks from the interest rate turnaround. In any case, for the market for luxury real estate, the real estate agent chain Sotheby’s International Realty in Germany reported that prices for properties from the 1970s to 1990s were stagnating or even falling. The reasons are, on the one hand, rising interest rates and rising inflation. On the other hand, there was a lack of craftsmen and materials, which in turn led to cost increases and at least made properties in need of renovation less attractive. On the other hand, the demand for high-quality properties that do not require renovation is unbroken.
“We assume that prices will remain at a high level overall,” said Mirjam Mohr, board member at real estate loan broker Interhyp. “However, we think it is possible that the increase will flatten out compared to the current levels, prices could possibly also fall in some regions and/or segments – due to the current dynamic situation, however, forecasts are currently subject to great uncertainty.” In any case, Interhyp does not assume that that the increase in construction interest rates in Germany has already reached its peak. Mohr said: “We currently expect interest rates on ten-year loans of 3.5 to about 4 percent by the end of the year.”