Record drop in demand for construction financing


Lerato Khumalo

The energy crisis, inflation and rising interest rates are causing uncertainty among consumers. New business in construction financing is particularly affected.

Demand for construction financing has continued to fall as interest rates have risen. German banks’ new business in real estate loans to private households and the self-employed fell by 28 percent in September compared to the same month last year, according to new data from the consulting firm Barkow Consulting.

With a volume of 16.1 billion euros, new business is at its lowest level since 2014, according to the analysis, which is based on figures from the European Central Bank and the Bundesbank. The new business reported consists of extensions and renegotiations of existing financing as well as loans taken out for the first time. Barkow spoke of a record decline and an accelerating downward trend.

Credit brokers also reported in a survey that consumers were very cautious. “With the rising interest rates, many people have recalculated, made compromises on the property or refrained from buying property for the time being,” said Interhyp, for example. “Demand on the market is currently falling across all channels,” said Michael Neumann, CEO of Dr. Klein. The company Hüttig & Rompf has observed “definitely a clear sense of uncertainty among consumers and those interested in property.”

In recent months, new business in building finance has already deteriorated due to the rise in interest rates. Since the beginning of the year, interest rates for ten-year real estate loans have more than quadrupled to around four percent. This often amounts to hundreds of euros in monthly installments. “There has never been such an increase in interest rates,” said consultant Peter Barkow. In addition, banks are checking applications for real estate loans more strictly due to high inflation – for example, they are assuming higher living costs for consumers.

As if that were not enough, the sharp rise in construction prices is also causing problems for builders. Many residential construction projects are already being cancelled. According to the Ifo Institute, 16.7 percent of the construction companies surveyed reported cancelled orders in September, significantly more than in August. With the tougher times on the real estate market, there is a lot of nervousness about what will happen next after prices have shot up for years.

All of this has left its mark on demand for real estate loans. According to the auditing company PwC, new business in housing loans from German banks to private households reached an all-time high of just over 32 billion euros in March, but it declined in the following months and fell to 18.5 billion euros in August.

After the volume of new financing in May was almost 20 percent higher than in the previous year, it turned negative from June onwards, according to Barkow Consulting. In August, the year-on-year deficit grew to 19 percent and in the following month to 28 percent. The total volume of construction financing rose by a good six percent in September – still more than the long-term average.

Construction financing is a very important business for German banks. Private real estate loans make up the largest share of their loan book at around 40 percent. After years of boom, the portfolio stood at 1,555 billion euros in September, according to Barkow.

The decline in construction financing is worrying the banks. “Demand has collapsed from one day to the next. Many projects in the planning stage are being cancelled,” savings bank president Helmut Schleweis recently told the “Handelsblatt”. And the deputy head of Deutsche Bank, Karl von Rohr, assumes that “the real estate business will be weaker across the industry, not just in the short term, but also in the medium term.”

The Bilthouse Group, under whose umbrella several credit brokers are united, can confirm the reports about the downward trend. “In the past, you could still finance with very little or no equity.” At present, some financing requests cannot be passed on to banks “because the customers cannot bear the increased interest burden.”

Ditmar Rompf, CEO of Hüttig & Rompf, also observes that banks have become much more restrictive in their lending practices. “They look particularly closely at relatively low equity levels.” The proportion of prospective buyers who have to be sent home has risen significantly.