While interest rates are rising, property prices are falling. Experts explain whether it is worth buying or building a property now.
The situation on the real estate market is tense. The high construction interest rates, which are now around 4 percent, are putting off many people who want to buy and are causing demand for homes to fall. This means that the available real estate supply is less competitive and sellers have to ask for more moderate prices. So is this a good chance for people who want to buy to get a real estate bargain? Or is caution appropriate?
According to Max Herbst, describing the current time as “a good time” to buy a property is “perhaps a bit exaggerated”. However, anyone who calculates carefully and looks for or plans the ideal property does not necessarily have to abandon their plans, even in the somewhat turbulent market phase, says the founder of FMH Financial Consulting.
The advantage that buyers have now: time. Time to look for properties in peace and quiet and to plan and calculate energy-related installation and conversion work. The pressure to decide on a property as quickly as possible before another interested party snatches it away from under their noses has been somewhat reduced by the drop in demand. “Even if interest rates should rise by 0.25 percent in the meantime, that certainly won’t put a stop to the purchase of property,” says Herbst.
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Jörg Utecht, CEO of Interhyp, Germany’s largest broker for private mortgages, also sees certain opportunities for buyers in the changes in the real estate market: “In recent years we have experienced a seller’s market. There were fewer properties, which usually attracted a lot of interest.” That is now changing, says Utecht.
Prices fell and the supply of available properties was significantly larger than before. With a nice side effect: buyers could now even negotiate the asking prices again.
According to the Federal Statistical Office, apartments and single- and two-family houses became cheaper in the last quarter of 2022 than they have in 16 years. On average, the price decline for residential properties was 3.6 percent compared to the same period last year.
The prices for single- and two-family houses tended to fall more than those for condominiums. The price drop did not even stop at the popular German metropolises – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf: there, people had to pay an average of 2.9 percent less for single- and two-family houses, and 1.6 percent less for condominiums than in the same period last year.
Interhyp also notes that customers financed different properties in 2022 than before. Demand for new buildings has declined, while demand for older and smaller properties has been high. One reason could be that, according to the loan broker, the price decline for properties built before 1990 was on average almost twice as high as for properties built after 2010. Buyers, sensitized by the energy crisis, were probably less willing to dig deep into their pockets for older properties.
However, when it comes to these properties, those who would like to buy should pay attention to which energy-related work has already been carried out and which still needs to be done, advises Max Herbst. Ideally, this should be taken into account when financing. Because: “Energy-related installations are becoming more and more standard and cost a lot of money,” says Herbst.
Basically, people who currently want to buy or build a property have to rethink their financing. With construction interest rates tripling or even quadrupling, the interest burden on the monthly installment is now significantly higher. This means there is less money left for repayment.
Max Herbst gives an example of a loan of 400,000 euros: Anyone who paid it back a year ago with one percent interest and three percent repayment had a monthly burden of 1,333 euros. A similarly high rate can still be achieved now: with four percent interest and one percent repayment, the loan rate is 1,667 euros and is therefore still affordable for many.
The big difference: the total costs and the length of repayment. Assuming that the interest rate does not change until the end of the term, the loan will become more expensive from 460,500 euros in the case of the low interest rate to 806,100 euros in the case of the higher interest rate – almost double. In addition, the term until the loan is fully repaid will be extended enormously.
