Building interest: development and current situation

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Building interest: development and current situation

For a long time, building interest rates were at a historic low. In January 2010, people willing to build were still paying 3.5 percent effective interest for a home loan, but at the beginning of 2022 the interest rates were just over one percent – a significant downward trend in building interest rates, which made building financing cheaper.

This was also due to the low key interest rate of the European Central Bank (ECB), which is an important starting point for the level of building interest rates.

But the situation has changed: prospective property owners are currently experiencing difficult times, as building interest rates are currently over four percent.

Because building financing extends over a long period of time, even small differences in interest rates mean a large additional burden or relief. How long the interest rate
rise will last is uncertain.

It's not just building interest rates that are rising

In addition to the rising building interest rates, there is also an inflation rate, peaking at just over 10 percent, which “eats up” the equity you have saved. At the same time,
property prices and construction prices continue to skyrocket due to continued demand.

Our graphic shows you the interest rate development since 2003 for real estate loans to private households – with terms of up to 5 years, up to 10 years and over 10 years.
The values are based on information from the Deutsche Bundesbank.

Current building interest rates: key interest rate and inflation rate

Key interest rates and inflation rates influence, among other things, the current building interest rates. That’s why you should always keep an eye on their developments. Here we summarize the most important values for you:

• Key interest rate: In order to counteract the continued high inflation, the Council of the European Central Bank (ECB) raised the key interest rates in the euro area by another 0.25 percentage points to the current 4.50 percent on September 14, 2023.
According to Schwäbisch Hall capital market expert Dr. Rainer Eichwede, the increase means one thing for building financing interest rates in Germany: “They will not be able to fall significantly.

However, we do not expect any short-term jumps in interest rates, but rather assume that they will continue to move in a volatile sideways movement.”

• Inflation rate: According to the Federal Statistical Office, the inflation rate in Germany was 6.1 percent in August 2023. In July, the inflation rate – measured as the change in the consumer price index (CPI) compared to the same month last year
– was 6.2 percent.

Development of building interest rates: This is what the capital market expert says

Rising interest rates, rising prices – but what will happen next and what impact will they have on the real estate market? There are no simple answers to these questions. Due to the current general conditions, forecasts are also difficult for our capital market expert Dr. Rainer Eichwede difficult:

Where does this lead from a consumer perspective?

Eichwede: “One thing is certain: Given the current ECB interest rate policy, building financing interest rates will not be able to fall back to the long-term low interest rate level of the past 15 years in the next few years. However, we do not expect any short-term jumps in interest rates, but rather assume that they will continue to fall a volatile sideways movement.”

What consequences does this have for prospective property owners?

Eichwede: “We are currently experiencing a slight decline in real estate prices.
However, due to the high demand and high construction costs, real estate prices can no longer fall much overall.

The countertrend is already becoming apparent: construction projects are being postponed on a large scale, and the number of building permits is also continuing to decline significantly. This will drastically reduce the supply of new living space in one
or two years, with corresponding consequences for tenants and buyers.

My advice:
Make provisions with your own capital, make a personal cash grab, compare financing offers, closely monitor the local real estate market and jump on the opportunity when the opportunity arises.”

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