Real estate loans: how are real estate interest rates changing?

According to Interhyp, the stable level of interest rates, the (still) low prices and the bargaining power make the purchase of real estate attractive at the moment – the development of interest rates depends more on the property markets capital than the monetary policy of central banks.

The real estate market is increasingly stabilizing into a “new normal” and interest rates are stabilizing at a constant level, says Mirjam Mohr, commercial director of credit broker Interhyp, in the latest interest rate update. interest. This leads to better affordability and planning for potential property buyers.

“A new, healthier balance has emerged with greater real estate supply than in previous years and greater price negotiating power for buyers,” Mohr said. Property prices remain lower than before the interest rate reversal.

ECB key rate: effects on the real estate market

However, the key interest rate policy of the European Central Bank (ECB) is less important for the development of construction interest rates than the development of capital market interest rates, as Carsten Brzeski, chief economist for Germany and Austria at ING direct bank, explains. Already in autumn 2023, financial markets assumed that the ECB would lower its key rate relatively quickly during the year 2024. Since then, interest rate cuts of around 125 basis points are expected by end of December and integrated accordingly. This resulted in a significant drop in building interest rates below the 4 percent mark.

“Financial markets have now given up their aggressive expectations of falling interest rates, which has led to rising interest rates in the capital markets,” Brzeski said. If the ECB is expected to slowly reduce its key rate from the summer onwards, capital market interest rates should no longer react. “Only if the ECB moves towards more monetary support for the economy next year could capital market interest rates fall further.”

Forecast: three ECB interest rate cuts of 25 basis points each

At a conference, Brzeski stressed that financial markets' expectations of the ECB had changed slightly since then. These would currently imply a reduction in key interest rates of only around 100 basis points in 2024, which has recently led to a slight increase in interest rates in the capital markets.

The expert also said he expected the ECB to cut interest rates three times, by 25 basis points each, by the end of the year. According to Brzeski, central bankers will be reluctant to cut the key interest rate too quickly until they are certain that inflation will remain consistently near 2 percent. “If the inflation rate remains constant over the next two months and wages do not increase, the first cut in key rates could take place in June,” predicts ING's chief economist. Most credit institutions see this in the same way from the monthly panel of Interhyp interest rates.

Construction interest rates range from 3.5 to 4 percent

If the ECB remains on track towards a first interest rate cut in June 2024, loan interest rates should initially continue to move sideways. The majority of experts in Interhyp's interest rate panel estimate that construction interest rates for ten-year loans will be in the range between 3.5 and 4 percent in the coming months.

However, Interhyp CEO Mohr also notes that real estate prices have increased slightly again since the start of 2024 due to increased demand. “This overall positive image of the real estate market provides a very good incentive for potential buyers to realize their dream of homeownership now,” says Mohr.

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