“falling trend”
The situation is easing somewhat with the construction interest

7/29/2022 8:41 am

Due to the sharp rise in the cost of real estate loans, building or even buying a home has become quite expensive. According to financial advisors, however, interest rates are now showing at least some signs of relief. Behind this are economic concerns – they are slowing the rise in interest rates.

Experts are breathing a sigh of relief for builders and real estate buyers after the steep hike in interest rates. Following the recent declining trend, they expect construction interest rates to move relatively low or move sideways by the end of the year. Munich-based credit broker Interhype said that before the European Central Bank’s hike in key interest rates, there was a significant drop in interest rates for ten-year construction loans. They were recently at around 3 percent, after a good 3.4 percent at the top.

“At the moment the trend in construction interest is declining,” said Max Herbst, founder of FMH Financial Advice. There is a short-term decline, the uptrend is broken. Until recently, Herbst still thought a 4 percent build rate after the summer break was possible. After interest rates more than tripled from 0.8 percent to more than 3 percent since January, Interhype now expects less momentum.

Concerns about slowing interest rate hike in the economy

“Banks have already heeded expectations of planned rate hikes, and concerns about the economy are becoming increasingly important,” explains Mirjam Mohr, director of retail banking at Interhype. This slows the rise in interest rates. Now there are signs of a tighter monetary policy. Interhype expects construction interest rates for ten-year loans to rise marginally to 3.5 to 4 percent by the end of the year.

Dietmar Rompf, CEO of construction financier Huttig & Rompf, is more reserved. Most of the interest rate hikes announced by the ECB have already been projected into building interest rates. He considers 3 per cent interest at the end of the year as realistic.

Inflation puts central banks under pressure

The reason for the increase in construction interest rates since the beginning of the year was high levels of inflation, which is putting central banks under pressure to raise interest rates. The ECB has also announced further rate hikes. In anticipation of a tighter monetary policy, yields on ten-year government bonds, which are used as the basis for construction interest, increased. Recently, however, yields have declined sharply.

The hike in interest rates from January means a heavy burden on the borrowers. Comparison portal Check24 recently calculated that financing more than 400,000 euros at an effective interest rate of 3 percent results in about 79,000 euros in additional costs over ten years. Real estate expert Pekka Sagner of the German Economic Institute (IW) expects interest rates to plateau. There has been obvious exaggeration lately, he says.

Sagner believes that interest rates could build up and fall if further increases in interest rates by the ECB trigger concerns about a payments crisis in highly indebted countries such as Italy. “The idea that rising prime interest rates automatically means building higher interest rates is misleading.” Concerns about a new debt crisis in Southern Europe could make the Bund more attractive to investors. This would raise their prices and, in turn, reduce the yield on federal bonds — and with them interest rates on construction projects.

The ECB has already announced that it will intervene by buying bonds if necessary, should interest rates on securities from euro countries rise disproportionately. FMH expert Herbst also believes that Italy’s situation with the recent government crisis may prompt investors to seek safety in federal bonds. However, property owners should not rely on low building interest rates. The situation is too delicate for this.