There was much talk in the financial press in late January when benchmark German debt yields turned positive for the first time since the onset of the Coronavirus pandemic. Germany's 10-year bond yield is often viewed as a benchmark for borrowing costs across the Eurozone, and a measure of the 'spread' investors in real estate are targeting compared to a 'risk-free' investment.
Yields worldwide on bonds have risen, led by the US, as the spectre of inflation comes back to haunt markets. Eurozone inflation rose to 5% in December, and was even higher in Germany, the highest since the introduction of the euro two decades ago.
The Bund's 10-year yield note rose on January 19th as high as 0.013 per cent, a rise of 2 basis points on the day and the highest level since May 2019, reflecting a drop in the price of the debt. In mid-December the Bund yield was registering minus 0.4 per cent. The Bund yield has (at time of REFIRE writing) slipped back temporarily into negative territory again.
The German government's 10-year borrowing rate had been negative for nearly three years, with investors prepared to pay for the privilege of lending to the sovereign state for ten years or more. These bond investors have been starved of any positive return since then. The prospect of the European Central Bank slowing down its programme of emergency bond-buying from March onwards and tightening its monetary policy overall, has pushed bond yields higher. In the US, the Fed has also indicated a series of imminent interest rate rises to combat inflation, starting in March, while investors are gaining confidence that there is light at the end of the COVID tunnel.
Germany's economy grew by 2.7% in 2021, according to the Federal Statistics Office, but growth in 2021 was 2% lower than in 2019, showing that the economy has not yet returned to its pre-pandemic levels.
So, what are the implications of this for real estate investors?
Many banks have already raised their interest rates for building finance since the beginning of the year. Michael Neumann, CEO of fintech and mortgage matcher Dr. Klein, believes that the assumption that the Fed will act faster and more energetically than Fed chairman Powell has recently signalled is the motor driving up interest rates in Germany
Dr. Klein's current best interest rate are 0.62% regionally and 0.81% nationally are still very favourable, but Neumann says the time of rock-bottom interest rates is over, and the all-time low of 2020 won't be visited again. And the inflation trajectory is still the big unknown. "If inflation rates do not decline significantly, even though the special effects caused by the pandemic, such as supply bottlenecks, decrease, the pressure on the ECB to review its monetary policy will increase. And if it announces a more restrictive approach, this could make mortgage rates more expensive."
Another factor could also push up interest rates - the higher requirements for banks in terms of the ír capital buffers for building finance, recently announced by the BaFin. "Basically, the higher capital adequacy requirements increase the refinancing costs of the banks - and thus also the conditions for consumers," says Neumann. However, given the competition in the sector, Neumann doubts that the banks will pass on the higher costs directly to their customers. "The increase in price WILL be noticeable, but not with significant spikes. A much stronger factor for the construction loan interest rate is the general development on the market."
No great interest rate rises this year, then? Despite the European Central Bank at its last council meeting in December nearly doubling its inflation expectations for this year to 3.2%, Neumann still expects the bank to hold to its course of loose monetary policy. "Here's where we see ECB boss Christine Lagarde cementing her path once again. No exit from cheap money and probably no increase in the key interest rate this year. As long as the ECB continues to buy bonds to such a relevant extent, this will clearly limit the rise in mortgage rates."
Even without big rate rises this year, the trend long-term from here is upward, he says. Neumann advises potential residential property buyers not to rush into a decision to buy right now, but to continue to look around. And if they find the right property, then act decisively, since property prices are likely to continue moving upwards for a while yet.
