Fears of rising inflation and climbing bond yields have led to deteriorating conditions for borrowers for German residential property over the past couple of months, according to the monthly Bauzins-Trendbarometer issued by private mortgage broker Interhyp.
The barometer shows that over the last ten weeks interest on ten-year fixed loans have risen by 0.2 percentage points and are now at about 0.9%.
The readings, taken from leading German banks, the majority of respondents held the likelihood of interest rate rises six months and a year out for 'possible'. Several respondents see the likelihood of rate rises as 'likely', and among the brokers, several are advising their clients to consider forward loans, which for a low cost, offer a higher degree of certainty as to their future obligations.
Brokers like Dr. Klein have detected rising demand for forward loans. Michael Neumann, CEO at Dr. Klein, said recently, "When the yield curve swings more sharply than usual, demand usually rises as well."
When that happens, private borrowers faced with a refinancing typically start calculating how much it would cost to lock down the current interest rate for the future, at for anything up to 60 months ahead.
Five years ago, for example, in 2016 the interest rate was about 1.8%. The average forward premium for 60 months is currently 0.68%. Good forward loan providers are offering well below 1.80% for a 15-year fixed rate loan. In a recent survey published by business magazine WirtschaftsWoche, several banks were featured where, with a lead time of twelve months, borrowers could secure financing at as low as 1.0% plus a small surcharge from some nationwide providers, while regional providers such as Sparda-Bank Hessen were even below the 1.0% level including premium.
With a lead time of 3 years, rates rise to between 1.2% and 1.35%, with some regional banks even more competitive. With up to five years locked in, Postbank is offering 1.53%, Münchner Hyp 1.63% and Gladbacher Bank 1.53%.
Interhyp released other interesting information about consumer borrowing behaviour. For example, the average amount borrowed to buy property has risen over the past ten years from €194,000 to €330.000. Despite this, Interhyp says there is still little danger of a bubble as in the same period the amount of equity capital from the borrower rose from €83,000 to €115,000, the loan-to-value ratio from 78% to 82%, and the initial repayment rate from 2.6% to 3.3%. The broker said it has plenty of anecdotal evidence from the banks of numerous unscheduled repayments, reducing the overall borrowing burden. Bank were being much more scrupulous in dealing with mortgage applications, and this scrutiny had only increased during the corona pandemic.
In fact, the corona pandemic has if anything spurred the demand for mortgage financing. Last year new mortgage business underwritten by banks and Sparkassen rose to a record €273bn from the previous year's €263bn according to a new study from consultants PwC. This brought the amount lent out to private borrowers from the banks and Sparkassen to nearly €1.4 trillion, up from €1.3 trillion the year before. The growth in the total amount lent rose by 6.6% in 2020, up from 5.7% in 2019, with the difference being made up in higher interest rates and higher property prices.
According to Tomas Rederer, partner and lending expert at PwC Deutschland, "Despite rising real estate prices and the economic uncertainty, the interest of private clients in real estate remains unbroken. Conditions for building finance should remain attractive in the medium term and continue to fuel demand."
With lockdowns and the perspectives for home offices, people are reassessing what they value in their home, including the demand for more space. Interest rates, while rising, remain low and there is still a lack of investment alternatives. That's why property buyers still paid 7.4% more on average than in the previous year, data from the Federal Statistical Office shows.
Last year property buyers brought in 20% equity on average when buying, according to mortgage broker Hüttig & Rompf, four percentage points less than in 2016. The average price paid for a home was €493,000.
However, as in other countries, another study by Interhyp shows just how difficult it is to buy a property without family help. The Interhyp researchers surveyed 3,353 property owners, and concluded that large swaths of the population are simply excluded from home ownership as they lack that critical family support.
According to Jörg Utecht, CEO of Interhyp, talking at the group's recent 2020 annual results press conference, "Property ownership is becoming an issue of fairness and equitability and is increasingly dependent on family." Large sections of society are now excluded from owning their own property, he said. This situation is exacerbated by the incidental purchase costs that have to be paid out of pocket, such as Grunderwerbsteuer, and brokerage and notary costs.
The Interhyp study showed that a quarter of the private borrowers surveyed said they could not have managed the property financing without support from their private environment. 79% of respondents who financed a property last year took out a bank loan for this purpose, 51% drew on savings and 29% claimed help from friends or family. State subsidies played only a minor role in the financing: 89% of participants would have bought even without state subsidies, only 11% could not imagine buying without money from state funds. At the same time, 55% are fundamentally convinced that there are ever higher hurdles to the purchase of residential property, essentially keeping them out.
