Rising interest rates: Buying real estate is becoming so expensive

Rising interest rates: Buying real estate is becoming so expensive
Written by insideindyhomes


Status: 08.06.2022 2:47 p.m

Rising interest rates make buying real estate more and more expensive – and sometimes unaffordable. Experts expect that many families will soon no longer be able to afford their own house.

By Angela Göpfert,

The real estate market has taken a dramatic turn. The days of historically low interest rates for homebuyers are over. While the average mortgage interest rate was 0.9 percent in December 2021, it is now 2.8 percent. It has therefore more than tripled within half a year. According to experts, there is no end in sight to this trend – on the contrary.

“The average mortgage interest rate will already exceed the three percent mark in June or July. Incidentally, with a loan-to-value ratio of 80 percent, we are already at an average interest rate of three percent,” says Max Herbst from the Frankfurter Finanzberatung (FMH) of the same name conversation with

Up to four percent mortgage interest until the end of the year

However, three percent should not be the end of it for a long time. Financial expert Herbst expects mortgage interest rates of three and a half to four percent by the end of the year. “The inflation rate continues to rise, and the federal bond is also constantly rising, so why should it end at three percent?”

At the beginning of the year, the yield on ten-year Bunds had climbed above the zero percent mark for the first time since 2019 and had risen significantly since then. Most recently, at over 1.3 percent, it had reached its highest level since mid-2014. The ten-year government bonds set the direction for mortgage bond interest rates and thus indirectly for building interest rates.

“Home ownership remains attractive despite interest rate hike”

But from which building interest is the purchase of real estate still worthwhile? When is it cheaper to rent? The German Economic Institute (IW) investigated this question in a current analysis together with the real estate company Accentro. The IW economists assume that even with an interest rate of three percent at most German locations there are still considerable cost advantages for owner-occupiers. “Home ownership remains attractive despite the turnaround in interest rates.”

The level of the interest threshold above which tenants are better off financially than buyers depends primarily on the place of residence. The “neutral interest rate” for ten-year financing, from which the owner-occupier costs correspond to the new contract rents, is 2.8 percent in the seven German metropolises, the IW calculates. In the environs of the cities and metropolises, on the other hand, it is 3.5 and 3.6 percent respectively. So far, the housing market has been able to cope well with the previous rise in interest rates, according to the IW economists. Significant price declines are therefore not to be expected.

Dramatic consequences for buyers

Financial expert Herbst sees it similarly. In addition, house prices would have to fall by almost 20 percent to counteract the rising interest rates. “That is not to be expected, there are still enough buyers there. There is no bubble that bursts.” The latest developments in building interest rates therefore have sometimes dramatic consequences for future home buyers, as the expert explains with an example.

“Assuming the principle that a family should not spend more than 30 percent of its income on real estate financing, a year ago a family with a monthly net income of 4,000 euros and equity of 80,000 euros could buy a property worth 450,000 euros purchase,” says Herbst. “Today, the same family can only afford an apartment worth 366,000 euros. So today they get 84,000 euros less house for their money.”

Significantly higher residual debt after ten years

The following calculation by FMH experts also clearly shows how much the tripling of building interest rates since December (then: 0.9 percent) is affecting new property owners: “A family wants to take out a loan of 400,000 euros and a term of ten years 0.9 percent interest and a monthly rate of 1,300 euros, the remaining debt amounted to 274,483 euros after ten years.”

The family, which finances 2.8 percent today, has a residual debt of 349,290 euros with the same monthly burden. “That makes a difference of almost 75,000 euros.”

“Division of Society”

According to experts, rising mortgage interest rates will reduce the number of property buyers in the future. “It is clear that with rapidly rising interest rates more and more groups of buyers are falling out of the market,” says IW real estate expert Michael Voigtländer.

“In the coming time, a very large group of buyers will simply disappear,” says financing professional Herbst. “The division of society into tenants and those who earn a lot, raise a high proportion of their own capital and can therefore continue to buy even when interest rates rise, will intensify.”

Houses more expensive in the summer months

For real estate owners who are thinking about selling, the window of opportunity will soon be closing if they still want to achieve a high price for their house or apartment. This is not only due to the rising construction interest rates. There is also a noticeable seasonal effect. “House prices are highest from June to September and lowest from December to March,” said Dimitri Speck, founder and chief analyst at investment advisor Seasonax Capital.

But where does this difference come from? The seasonal course is apparently closely related to the weather. “In the summer months, because of the sun’s rays, houses look friendlier than in the dark season,” says Speck. “Therefore, buyers are willing to pay a higher price. In winter, it’s the other way around.”

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