By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Resi market cools as would-be buyers and existing homeowners feel the squeeze
Germany’s residential market is feeling the strain as rising interest rates heap pressure on a sector already battling higher financing costs, with some experts predicting that up to 15% could be slashed from values.
Last month, the ECB decided on the biggest interest rate increase in its history in a bid to combat record inflation in the euro area, raising the key interest rate by 0.75% to 1.25%. For many, it just exacerbated existing tensions, given that the real estate sector was already feeling the weight of high inflation, increased construction costs and a lack of skilled workers.
‘As a result, interest rates for real estate loans will probably continue to rise and again increase the pressure on the residential real estate market,’ said Oliver Wittke, managing director of the Central Real Estate Committee (ZIA), speaking in Berlin last month. ‘It is the sum of the tensions that is causing us such extreme problems.’
Predictably, real estate financing is becoming more expensive as a result. Mortgage broker Interhyp is forecasting interest rates for 10-year loans to hit 3.5% by the end of this year. Understandably, many investors are taking a wait and see approach: ‘On the demand side, higher financing costs have halted the activities of numerous institutional investors, so that no noticeable revival in transaction activity is to be expected for the second half of 2022,’ said Jens Tolckmitt, managing director of the Association of German Pfandbrief Banks (VDP). In addition, in the case of owner-occupied residential property, higher interest rates are making it increasingly hard for people to buy their own home.
Existing homeowners feeling the pinch
Existing homeowners are already feeling the pinch, according to credit broker Dr. Klein, which calculates that on average, homeowners were making mortgage payments of €1,181 per month at the beginning of the year, a figure that has since risen to €1,416 per month, a hike of 20%. Borrowers, on average, took out mortgages of €322,000 in August, or €40,000 less than at the beginning of the year, which means they are now having to finance a smaller loan amount at a higher monthly rate.
Around €278.6 billion in residential loans were financed in Germany last year, according to the VDP and the Bundesbank, an 11.4% increase y-on-y. However, given today’s strained financial conditions, the VDP is forecasting a slight decline in new financing business this year for the first time since 2009, for both residential and other real estate assets classes. In the office property market, the VDP does not expect an increase in letting and transaction volumes during the rest of the year.
Pressure on Germany’s real estate sector is certainly being exacerbated by the wider geopolitical challenges and energy crisis in Europe. In the first half of 2022, around €140 billion in residential loans were underwritten in Germany, although the economic uncertainties caused by the war in Ukraine, the massive increase in energy prices and inflation are all expected to put a significant dampener on new business for the rest of the year. According to the Economic Expert Survey (EES) conducted by the ifo Institute and the Swiss Economic Policy Institute published today (17 October), inflation expectations have risen significantly compared with expectations in the previous quarter. The expected average inflation rate of 9.5% in the third quarter represents a significant increase compared to the expected rate of 7.7% in the second quarter. If the experts are correct, the inflation rate for 2022 will be 6.7% higher than the World Bank’s average inflation rate over the past decade (2010 to 2019).
Against such a backdrop, cancellations in Germany’s residential construction sector are surging ever higher, to 16.7% last month, up from 11.6% in August, according to the ifo: ‘What with skyrocketing material and energy prices, as well as the rise in financing interest rates, planning certainty is gone and construction costs continue to climb,’ said ifo researcher Felix Leiss. ‘For some developers, the overall situation is no longer tenable, and they are shelving projects or even pulling the plug entirely.’
