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14 02 2019

Unexpected Drop in Building Finance Rates

In late 2018, an interest rate reversal seemed to loom on the horizon—many analysts agreed that rates would start climbing again in 2019.1 A recent report by the Frankfurter Allgemeine Zeitung suggested that quite the opposite happened to building loan rates at the beginning of the year.2 Mortgage interest has softened slightly and by the end of January was below the level it had been at year-end 2018, on average.

The most affordable case cited by the paper is a loan offer by HypoVereinsbank for a 200,000-euro loan with a fixed-interest period of ten years and an LTV ratio of 60 percent that will cost the borrower 0.94 percent in annual interest. Analogously, comparable offers by other banks have approached the one-percent mark.
 

End of the Zero-Interest Policy Not a Foregone Conclusion

The benchmark index of the biallo.de credit portal for ten-year loans at fixed interest shows the same level as a year ago, even though financing conditions had already deteriorated slightly in the course of 2018. But that does not necessarily imply that the anticipated interest rate reversal has become a fata morgana. Since the European Central Bank (ECB) did let its programme to buy up European government bonds expire in December 2018 as announced, it seemed reasonable to expect the key lending rate to start perking up during the second half of 2019.

If this came to pass, it would probably send building loan rates back up as well. However, the slowing economic cycle and growing risks for the global economy—including Brexit, the economic situation in Italy and the trade conflict between the United States and China—have lately raised doubts as to whether the ECB will, as the year progresses, have the leeway it needs to end its zero-interest rate policy at all.3
 

It will Not Get any more Affordable than this

Buying a house or flat is nevertheless unlikely to become any more affordable for private households in the near future. The trend reversal for real estate prices that had already been predicted for the previous year by some is nowhere in sight. Instead, prices maintained their brisk upward momentum from previous years in 2018. Since building activity is still not up to speed even though completions figures have admittedly gone up, there is reason to expect the price growth to continue in 2019.4 Construction costs will match the trend, not least because of the capacity bottlenecks in the building trade.

Not even a further decline in lending rates—which is unrealistic anyway—would be able to offset a similar development in 2019. Add to this that buying is already more affordable than renting in many cases—and rent rates are poised for further growth in a number of German cities this year.5

 
1 www.faz.net/aktuell/finanzen/finanzmarkt/prognosen-sagen-hoehere-bauzinsen-im-naechsten-jahr-vorher-15942084.html?premium
2 www.faz.net/aktuell/finanzen/meine-finanzen/finanzieren/bauzinsen-sind-im-januar-noch-niedriger-als-ende-2018-16002840.html
3 www.spiegel.de/wirtschaft/soziales/ezb-ruehrt-leitzins-nicht-an-a-1249637.html
4 www.spiegel.de/wirtschaft/service/immobilien-preise-fuer-neubauten-steigen-so-stark-wie-seit-elf-jahren-nicht-mehr-a-1247360.html
5 www.spiegel.de/wirtschaft/service/deutschland-mieten-sollen-2019-um-bis-zu-fuenf-prozent-steigen-a-1245410.html