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Even an Interest Rate Hike would be Unlikely to Trigger a Deterioration of Prices

Property prices in many German cities are the highest they have ever been. This is to some extent explained by the current level of lending rates, which is extremely low, historically speaking. A concerned question on the minds of homeowners who bought their property in recent years is therefore whether their home would be threatened by a sudden loss in value if key lending rates were to rise. Experts have now sounded the all-clear signal for most cases. Postbank, which publishes the annual “Wohnatlas”1 as one of the largest nationwide surveys on the German residential property market, foresees an upward trend in prices and rents even if key lending rates were to rise, as it told the Frankfurter Allgemeine Zeitung daily.2

Sound Economic Situation Defuses Bubble Risk

The key foundation for this assessment is provided by the sound economic conditions in the country. The income situation in Germany is stable, according to Postbank. In addition, the building activity does not exceed demand in Germany, unlike in those countries hardest hit by the real estate crisis that started in 2007. This means that even the rise in interest rates that the European Central Bank (ECB) intends to execute in the second half of 2019 at the earliest3 will not necessitate a fundamental re-assessment of the situation.

If interest rates were to go up by around 0.5 percent, it would burden a household that has borrowed 200,000 euros with an additional 80 euros a month, or so the survey suggests. Since rent rates, too, are and will remain on a high level, this would change nothing about the appeal of buying property. On the contrary, Postbank assumes that real estate in attractive regions will keep getting pricier even though the price growth in the most important metropolises, such as Munich, Berlin or Hamburg, has already slowed. But the continued growth is likely to motivate people to keep moving to the suburbs rather than increase the price pressure in the cities themselves.

Interest Rate Hike by No Means Set in Stone

On top of that, there is definite cause for doubt whether the ECB will indeed decide to raise its key lending rate in the fall of 2019. It all depends on the economic situation in the Eurozone as a whole. Several renowned economists assume, for example, that the inflation rate will slow down in the year to come.4

If this came to pass, the hands of Europe’s Frankfurt-based monetary watchdog would be tied, because any interest rate hike would then definitely slow the economic growth. Given the fact that Italy, for one, is grappling with poor economic data, it is equally conceivable that the ECB will have to extend its low-interest policy throughout the coming year. Although it would usher in another lean period for traditional savers, it would further reduce the risk of deteriorating prices.