Building interest rates rise drastically

Effects of government debt on construction interest rates and the real estate industry

Building interest rates rise drastically

The planned billion-euro investments will lead to an increase in mortgage interest rates, which are based on ten-year federal bonds – an instrument used by the state to finance its debt.

Despite the fact that the next federal government’s multi-billion debt package has not yet been fully agreed, there are already signs of a significant impact on housebuilders. The prospect of rising government debt alone has led to a significant increase in building interest rates. This correlation may not be immediately apparent at first glance, but it is easy to explain.

If the state needs large amounts of money, it has to offer potential lenders attractive interest rates. In addition, rising government debt increases the risk for investors of recovering their capital. As a result, yields on government bonds rise significantly. The state raises money on the capital market, with ten-year bonds playing a central role – and these are of particular importance for building interest rates.

Building interest rates rise significantly within a few days

In just a few days, interest rates for mortgage loans with a term of ten years rose by 0.33 percentage points, according to figures from the consultancy firm Barkow Consulting. This increase represents the strongest weekly rise since the global financial crisis 18 years ago.
According to the financial services provider FMH, the average interest rate for ten-year loans is currently around 3.7 percent, while offers for a term of 20 years are only available above 4 percent.

Banks take a cautious approach to financing

As property buyers and house builders often take out loans amounting to hundreds of thousands of euros, any rise in interest rates hits them particularly hard – especially if it is significant, as has recently been the case. ING, one of the leading mortgage lenders in Germany, increased its conditions by 0.50 percentage points just a few days ago.
Other banks reacted similarly and also shortened the deadlines for submitting financing requests, as reported by Engel & Völkers Finance. This means that banks are currently acting cautiously and waiting to see how things develop in the coming weeks.

Conditions could continue to become less favorable

The real estate loan broker Interhyp, a subsidiary of ING, dares to look to the future. According to the majority of banks surveyed, conditions could deteriorate even further. The mortgage broker predicts that building interest rates will probably be between 3.5 and 4 percent over the course of the year.

Stress test for the ailing housing sector

The recent rise in construction interest rates comes at an inopportune time for the already ailing sector. The situation in residential construction had previously stabilized somewhat, with the number of building permits recently rising twice in succession.

There was also a clear recovery in the area of construction financing. However, the real estate market is now facing a new challenge. The current development could significantly curb consumer demand for construction loans.

Experts do not expect a new real estate crisis

According to FMH, building interest rates are not expected to stabilize until the economic outlook becomes more positive again at the earliest. The financial services provider assumes that interest rates will then settle at an average of 3.5 percent.

In the short term, the current trend in building interest rates could put some building projects into question. In the long term, however, most experts agree that the slight upward trend observed recently will continue after a brief pause. A new real estate crisis is therefore not expected.