Rising mortgage rates lower real estate prices

Real estate market : What happens if interest rates rise significantly?

Strong demand, limited supply - the real estate markets in Germany are booming: apartments, houses, offices, logistics space - there seems to be far too little of all of this. Even in the absence of other investment products. But the economy in Europe is approaching a turning point. The question arises as to what happens on the real estate markets if interest rates rise again to over three percent in the medium term.

In mid-June, the European Central Bank (ECB) announced that it would phase out its qualitative easing program in December this year. It would end a three-year period in which the bank triggered strong monetary policy stimulus to stimulate global growth. The announced withdrawal of the ECB from the bond markets could lead to an increase in yields; the relative attractiveness of real estate could be undermined. As interest rates rise, other investment alternatives tend to become more attractive again compared to real estate. And what happens then?

The effects of an interest rate hike will be multi-layered, time-shifted and overlapping. In addition, the macroeconomic development has to be taken into account. If the rate hike is accompanied by an economic slowdown, the effects can also be intensified.

Sales collapse, home ownership is becoming cheaper

At the moment real estate agents and home sellers are in top form when it comes to building home ownership, because the interest rates are so cheap. On top of that, there has recently been the Baukindergeld. There are people who like to follow these arguments because the dream of owning a home seems to have been born in most people's cradle.

From the seller's point of view, when interest rates rise, the sale of real estate and the construction of new houses will initially collapse, says building consultant Frank Hartung on request. It becomes problematic for residential properties, which for some time have been traded at prices that are far from reality. Hartung predicts that these prices will fall. In particular, residential property in metropolitan areas will then be much cheaper than it is at the moment. If you are currently buying an apartment to rent, you will be attracted by low interest rates and high rents. However, very few people realize that both attributes drive up the purchase price.

Institutional investors in particular tend to switch to the seller side when interest rates rise and are less active as buyers. As soon as construction rates rise, other investors will be the first to get out. Your demand goes down. The rate of return in the demanded markets is already less than two percent. One effect would then be that real estate prices would rise less dynamically. An expected moderate rise in interest rates would not, however, lead to an abrupt fall in demand from institutional investors, says Michael Neumann, CEO of Dr. Klein Privatkunden AG. In addition, the demand exceeds the real estate supply considerably and the building completions still do not cover the current demand. Neumann sees “no risk that a relevant part of customers will no longer be able to afford follow-up financing when interest rates rise”. The current repayment on the nationwide average is very high and the fixed interest rate is very long, so that at the end of a financing, most borrowers have a manageable residual debt.

If interest rates rise, this is only problematic for those who have not fixed interest rates for a long time. Those who took advantage of the favorable terms should be debt-free in 20 to 25 years. Those who have set the repayment installment in such a way that the loan is repaid with the payment of the last installment have financed optimally. “You will only have a problem if the prices you have paid are no longer achievable on the market,” says Hartung: “Whether a landlord will be affected in ten years from the fact that he will no longer enforce the current rents can is difficult to judge. ”Existing real estate investors may be tempted to sell their properties because they are no longer profitable. In the short term, rents will not be able to be increased by a corresponding amount.

Private bankruptcies as a result

From the buyer's point of view, the following scenario can be expected when interest rates rise: It will be tight for home builders who have fulfilled their dream “by force”. They often have an interest rate fixation of ten years and repay the loan with one percent. In this way, there is hardly any repayment and after ten years it has to be renegotiated. Two problems now arise: Is the house still as valuable as it was 10 years ago? Can the home builder pay the new installments?

There are many brokers who are already betting that these questions will be answered with "no" in eight or nine years. Private bankruptcies are the result, and many properties come onto the market. The banks will have to deal with foreclosures. Then there is the question of what the real estate is still worth. Buyers who have financed between one and two percent interest and still have to finance a high remaining amount after the binding period has expired will have major problems with the interest burden. Income growth will certainly not be enough to shoulder a burden that is suddenly twice as high.

Due to the low interest rates, there is currently a class of buyers who otherwise would not have been able to afford a property. "This demand will break down immediately if interest rates rise," says Günther Validling, expert for developed and undeveloped properties and member of the IVD Real Estate Association Germany.

Hartung calculates the following example: Assuming the buyer has taken out a loan of 200,000 euros, pays 2.5 percent interest and repays one percent. He comes to a monthly rate of 583.33 euros. It's portable. After ten years he has a remaining debt of 177,305.07 euros. “We take a positive approach and assume,” says the consultant, “that he has been saving diligently and now“ only ”has to refinance 150,000 euros. He takes out the loan at an assumed 6.5 percent interest rate, but remains at the (too) low repayment rate. He will have to raise EUR 937.50 per month, but after another ten years he will still have residual debts of almost EUR 129,000. "

Building is hardly getting cheaper

With rising interest rates, there is no reason for investors to take on the problem of real estate, says Validling: “One should not forget that before the banking crisis, the investor who bought a single apartment to invest was practically extinct. The return of these customers is almost exclusively due to the low capital market interest rates, because the problems that one has with individual properties - rent loss, renovations / refurbishments, etc. - have not changed. "

When building a house, things get a little more complicated with a view to rising building interest rates, because prices have little to do with interest rates. "It is then more the property prices that may fall again," believes Hartung. At least in regions in which "moon prices" are currently being demanded - such as in Berlin. The construction of new homes itself will hardly be cheaper because the price drivers are less the house providers. Rather, building itself is becoming more and more expensive - also due to political requirements.

The characteristics of the individual scenarios naturally depend heavily on the amount and speed of an interest rate hike. In the first step, of course, if demand falls, the supply will first be increased.

Further information at: www.hausbauberater.de

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