After years of boom, real estate prices are falling again this year on average. But if you want to buy a house now, curiously enough you will still have to pay more than in previous years. FOCUS online explains the reasons for this effect.
For years, real estate prices in Germany knew only one path - steeply upward. This has been reversed since last summer. In its housing atlas, Postbank assumes that this will become a long-lasting trend, with prices falling by an average of 0.2 percent a year until 2035. In 2023, rates are likely to be much higher. DZ Bank expects prices to be four to six percent lower than in the previous year. Dr. Klein, a construction finance provider, even expects a decline of more than 10 percent in rural regions. Allianz even expects prices to fall by an average of eight percent over the next two years. This comes after a decline of 3.3 to 4.2 percent depending on the type of property last year.
These figures look as if golden times have now dawned for real estate buyers. But that's deceptive, because although prices will fall in most German regions, you will still have to pay significantly more for your home than last year. The European Central Bank (ECB) is to blame. Its key interest rate increases have so far already caused the average interest rate for real estate loans to rise from 1.2 percent - the average of previous years - to currently around 3.1 percent. As the ECB is planning further interest rate hikes for the spring and summer, real estate interest rates could also rise even further.
How the ECB's key interest rate affects real estate
The ECB's key interest rate indicates the interest rate a bank must pay to borrow money from the central bank. It is currently 3.0 percent, but analysts estimate that it could rise to 4.5 percent by the summer. When banks have to pay more interest to borrow central bank money, lending rates inevitably increase to refinance those costs. The average interest rate for real estate loans is therefore likely to always be slightly higher than the prime rate. The difference between the lending rate and the prime rate corresponds to the net profit for the bank.
But that, in turn, has a direct impact on the cost of homebuyers. Since large sums are involved in buying real estate, even small increases in the interest rate have a big impact. Let's assume you want to buy a house for which you need a loan of 200,000 euros. At an interest rate of 1.2 percent and an assumed initial repayment of 3.8 percent, you would pay off the loan in just under 23 years, paying an extra 28,812 euros in interest. With an interest rate of 3.1 percent and a correspondingly lower initial repayment of 1.9 percent, you would need almost 31 years and pay 112,580 euros in interest. That's an additional cost of 83,768 euros, or 37 percent.
This percentage remains stable no matter how high your loan amount is. But what increases with it are the extra costs due to interest. A loan of more than 300,000 euros will cost you an additional 125,650 euros, a loan of more than 500,000 euros will cost you 209,418 euros, and if you can afford a luxury home - or a normal Munich condominium - for a million euros, you will have to pay an extra 418,834 euros.
Real estate prices are not falling fast enough
These higher interest costs are the reason why real estate prices are currently falling. Sellers can no longer demand the previous prices if the surcharges due to interest for buyers are getting higher and higher. The circle of buyers, who can afford a real estate, becomes ever smaller thereby and not everywhere can be found thereby still someone. Therefore the prices in rural areas, where the demand is smaller, fall also more strongly than in metropolises such as Munich, Berlin or Hamburg. Here, real estate prices could rise even further regardless of interest rates - simply because demand exceeds supply here to such an extent that sellers can demand even higher prices.
But even where prices are falling, real estate including financing will still become more expensive. This is because real estate prices would have to fall by around 27 percent just to compensate for the rise in interest rates from 1.2 to 3.1 percent. If today's 200,000-euro property were to cost only 146,000 euros, the total costs including the rise in interest rates would be at the same level as with the lower interest rate. However, such a price drop is utopian, at least in the short term. 27 percent lower purchase costs will be found at most in a few isolated cases in remote counties. If interest rates continue to rise this year, the problem will get even worse. At 4.5 percent prime rate and an assumed 4.6 percent real estate interest rate, a property becomes 140 percent more expensive. To compensate for this, purchase prices would have to fall by almost 60 percent.
When to buy now
What is not taken into account is that the duration of your real estate loan is also becoming longer and longer. Because if you don't want to increase the monthly installments, you will be able to pay off less and less of the actual loan debt at higher interest rates. Accordingly, you have to pay longer until the costs are paid off.
As a rule of thumb for whether a house purchase is worthwhile in your case despite everything, you should use the so-called rental yield. You calculate it by dividing the net rental income of a property - i.e. cold rent minus operating costs - by the total costs of the house purchase - i.e. purchase price plus ancillary costs plus interest. Rental yields of more than 4 percent are considered a good buy, and 6 percent or more is an excellent value. At lower values, you should weigh up whether this property is really worth the financial burden to you. The rental yield also plays a role if you want to occupy the property yourself, because it puts the purchase costs in relation to the rent you would have to pay without the purchase.
SOURCE: FOCUS ONLINE