What does the interest rate turnaround mean for the real estate market?

According to prophets of doom, property prices will soon plummet by up to a quarter. Even if one has to take a critical view of these sensationalist reports, the question remains: What effect will the interest rate turnaround have on the real estate market? Mortgages are more expensive than they were eight years ago. This dampens the buying mood and changes demand.

Various factors are affecting real estate financing. "These include the war in Ukraine, rising commodity prices and high inflation," comments Professor Dr. Steffen Sebastian from IREBS. The sharp rise in long-term interest rates has seen the biggest jumps in decades in recent months. According to Interhyp, ten-year construction interest rates were still at 1.0 per cent in January 2022, but at the beginning of May 2022 they were already at 2.66 per cent - a two-and-a-half-fold increase in a very short time. The last time mortgage rates were as high as they are now was in 2014 - with the big difference that property prices and thus the need for financing have risen immensely since then.

For a long time, rising interest rates seemed to be a thing of the past. For years, a zero interest rate policy applied in the euro area, which ultimately triggered the boom on the real estate market. Due to high inflation, the central banks in the USA and Great Britain have already initiated a turnaround in monetary policy. The European Central Bank could follow suit this summer.

Consumers should plan for increased financing costs for their own home, explains Prof. Dr. Rainer Jakubowski, Banking & Finance expert at the FOM University of Applied Sciences in Frankfurt am Main. However, he also points out that the financing options depend not only on the interest rate level, but also on the amount of the purchase. Financing costs are automatically reduced if a less expensive home is chosen. Credit-financed private house building only becomes an unbearable burden if one overstretches oneself with the purchase.

This recommendation makes it clear how more difficult financing conditions affect the price development of real estate. The turnaround in interest rates will be followed by a turnaround in property prices - to what extent remains to be seen.

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