Mortgage finance rates rise again after end-of-year dip

Ten-year fixed-rate real estate loans in Germany are currently running at around 3.9%, slightly down from more than 4% at the peak in mid-October 2022. Further volatility in the range of three to four percent is being predicted by Germany's largest mortgage broker Interhyp for 2023.

Interhyp's latest monthly Construction Interest Trend Barometer comments on the ECB's battle against inflation and the concrete expectation of further bank rate rises. Interhyp board member Mirjam Mohr said: "Volatile interest rates combined with concerns about the economy will continue to shape the financing environment for real estate buyers in the new year - we expect interest rate fluctuations of between three and four percent over the course of the year."

The ECB had further tightened monetary policy in December 2022 by raising the key interest rate in combination with the successive scaling back of bond purchase programs, despite a slight decline in inflationary pressure. The 0.6 percentage point drop in interest rates from mid-October to mid-December 2022 enabled borrowers to save as much as €6,000 per €100,000 loan over a ten-year period.

Interhyp says real estate buyers will continue to feel the financial effects of the war in Ukraine, the energy crisis and supply bottlenecks throughout this year. They point to the handling of the Corona pandemic in China, for example, as well as geopolitical changes that could influence market events. "The immense debt of many countries and inflation also set a framework for refinancing in the financial markets," Mohr said.

The changed interest rate environment is having the effect of bringing some movement into the 'deadlocked' real estate market as more residential properties are offered for sale, against a background of lightly falling prices in many big cities.

Interest rates had fallen in November and December by nearly 0.5%, as investors priced in the lower inflation figure for December, before economic fears rose and confidence sank at the turn of the year, with rates rising again in January.

Michael Neumann of broker Dr. Klein (part of Hypoport, and largest rival to Interhyp) said he expected interest rates to move sideways over the coming weeks, with some volatility but no break-outs in either direction. A further rise in rates by the ECB in the first half could lead to mortgage rates trending higher, he said, to over 4%, with the rate hovering between 3.5% and 5% in the mid-term. Most of the biggest mortgage brokers, including Deutsche Bank's team in a recent note, are predicting a year-end rate on five to ten-year fixed terms of 3.6%

Like her peers at Dr. Klein and Baufi24, Mohr of Interhyp is convinced that price visibility will soon be restored and deals and financing will pick up again. "After all, the demand for real estate hasn't gone away, the home ownership rate is the lowest in Europe, the desire to own a home is very high, the same goes for the need for housing."

Neumann of Dr. Klein said: "The current market is not normal. We've not seen a situation like this before. Although there are plenty of properties available and demand remains high, buyers and sellers are still not finding the way to each other."