"The market is back on the buy side"
Rebecca Scheidler, Managing Director of Engel & Völkers Finance, on current trends in property financing
On 12 September 2024, the European Central Bank (ECB) cut its key interest rates by a further 0.25 percentage points for the second time since 2019. This marks the start of a turnaround in interest rates - further rate cuts are to follow until 2025. The signal is positive, as the high inflation rate of recent months has fallen. A year ago, it was still at 6.4 per cent. The ECB is aiming for an inflation rate of two per cent for the eurozone. For many, the dream of owning their own home is now getting closer again. The market is thus developing from a seller's to a buyer's market again.
We have been in the market as financial advisors for ten years now and have seen time and again that buying a property is a matter of the heart. In Germany in particular, the decision to buy a home is often only made once in a lifetime. High interest rates make it difficult to fulfil the dream of home ownership. Property prices and interest rates are now on the buyer's side, so it is worth taking a look at the current market. KfW is also providing funding again in many areas, for example for energy-efficient building refurbishment.
"Compared to recent years, the market has developed from a seller's to a buyer's market."
Rebecca Scheidler, Managing Director at Engel & Völkers Finance
"Independent advice is important"
Rebecca Scheidler on financial options, possible refurbishment costs and the long-term nature of property
BELLEVUE: How can people judge for themselves what they can afford?
REBECCA SCHEIDLER: A thorough financial analysis and comprehensive advice as early as possible are important. All income and expenditure should be precisely itemised. Online calculators (e.g. www.ev-finance.de/finanzierung) provide a rough overview of the possible monthly burden for property financing. In addition to the instalment for the loan, additional costs such as land transfer tax, notary and estate agent costs, maintenance, insurance and taxes should also be factored in. Ideally, the monthly burden for property financing, including repayments, interest, ancillary costs and reserves, should be around one third of the net monthly salary. However, this is only a rule of thumb.
What mistakes are often made here?
Many people focus on the short-term affordability of the monthly instalment without considering the long-term impact on their financial stability. Additional costs such as repairs or rising interest rates are also sometimes ignored. Furthermore, it is important to take care of follow-up financing early enough before the fixed interest rate expires.
Which factors are most important in the assessment?
The most important factors when assessing financial viability are the available income, the amount of equity, the current interest rates for the loan, the term of the loan and any future financial obligations. Only those who know this data can correctly assess their own financial situation and the associated property financing. In my opinion, independent advice is therefore the be-all and end-all.
Do you have any tips for potential buyers?
My tip is not to go beyond your financial means. The property should also be affordable in the long term. Think about the possible costs of (energy-related) refurbishment for existing properties and also that the completion of a new build can be delayed and therefore cause further costs. Prospective buyers should remain flexible and examine various financing options and property offers in order to make the best decision. It is also important to ensure a solid credit rating and sufficient equity at an early stage in order to obtain better financing conditions.
"Politicians are called upon to create living space"
The key interest rate of the European Central Bank (ECB) influences the conditions at which banks can pass on loans to customers. An increase or decrease in the key interest rate generally has no direct influence on the level of property financing interest rates, as the expected development is usually already priced in in advance. Since peaking in November 2023, interest rates have fallen and are now remaining at a more or less constant level. I assume that there will mainly be sideways movements this year. Politicians are also called upon to create incentives for property purchases and new living space.
New construction has almost come to a standstill, so existing properties are gaining in importance. More and more people are also moving into the rental market. Even those who would have bought a property under the conditions prevailing at the time. Measures and subsidies should be taken for the energy-efficient refurbishment of existing properties. Vacant commercial properties could be converted into living space in a way that conserves resources. New construction projects could be driven forward by reducing bureaucracy, simplifying building authorisation procedures or lowering property transfer tax. It remains to be seen if and when politicians will be prepared to do this. I would therefore advise those who have found their dream property to grab it, because prices will rise again.
"Good time to buy thanks to stable interest rates"
Property financing interest rates in Germany are stabilising. They currently stand at three per cent for a 10-year term and sufficient creditworthiness. This is just under one per cent less than last October. Compared to last year, financiers can save several tens of thousands of euros over the term of a loan. Anyone looking to finance a property now is therefore in a much better position than last year.
In addition, the pots of the Kreditanstalt für Wiederaufbau (KfW) have also been full again since the end of February and applications for subsidised loans and grants can be submitted there. These are available for climate-friendly new builds, energy-efficient refurbishments or age-appropriate conversions, among other things. The interest rate for KfW loans in the programme is generally below the usual market interest rates. So now could be a good time for anyone thinking of buying a property.
"A good time for financing"
The days of constantly rising interest rates seem to be over. At the beginning of the year, building interest rates for people with a very good credit rating fell below the three per cent mark for a 10-year fixed borrowing rate. But it is not only people with a very good credit rating and sufficient equity who are benefiting. The interest rate cuts expected by the central banks this year are already priced into the current property financing rates. Compared to the peak in October 2023, the interest rate for a 10-year fixed interest rate has fallen by almost one per cent. Now can therefore be a good time to finance a property.
As new construction is still progressing very slowly and the KfW's subsidy programmes are expected to be stopped by February 2024, existing properties are becoming increasingly important. This may lead to prices rising again. I can therefore recommend anyone who has found their dream property to buy now and benefit from the lower interest rates and the still relatively favourable prices for existing properties.
"Optimistic into the new year"
I do not expect any massive increases in property financing interest rates at the start of 2024, as was the case in 2022. I assume that the ECB will keep interest rates at their current level in the first half of 2024. We have already seen in recent months that property financing interest rates for a 10-year fixed rate have levelled off in a range between 4.0 and 4.5 percent and that there have primarily been sideways movements.
All in all, the last few months have been characterised by a certain stabilisation and I am optimistic about the new year. Compared to recent years, the market has developed from a seller's to a buyer's market. The property market is less competitive than before, and buyers now have more time to take their time looking for the right property, adjusting various parameters and carefully calculating the financing. I recommend that all people who want to finance a property get to grips with the topic as early as possible and seek comprehensive advice. For example, the use of more equity and a good credit rating can lower the interest rate.
"The interest rate policy is accepted on the market"
The past year and a half has been challenging for the property sector, and the sharp rise in interest rates since 2022 has unsettled many people. But what we are currently realising: High interest rates are now accepted as the "new normal". And that is honestly the right thing to do, as the years of zero interest rate policy were the exception rather than the rule when we look back over the last few decades. At between 3.9 and 4.8 per cent, current property financing interest rates are still slightly below the average of the last 30 years.
I assume that interest rates will stabilise in this range and that we can primarily expect sideways movements. The rapid rise in interest rates is probably over. The boom on the German property market is also likely to be over. However, demand for housing is high and will continue to rise in the coming years. This means that a positive development in property values can be expected - especially in German metropolises and their peripheral areas.
I would advise anyone interested in buying or building a property to follow developments on the financial markets and central bank decisions and to seek advice in good time in order to make informed decisions. Even minimal changes in interest rates can make a difference of several thousand euros in the loan amount over the years.
Source: BELLEVUE. The interest rate commentary: "The market is back on the buyer's side"
