Rising construction interest rates – a danger for home builders?
my name is Axel Dittmann and I work as a construction financing specialist in the Himmelpforten branch of Volksbank Stade-Cuxhaven eG. Long time surfed the building interest rates on a very low wave. Currently, however, we are experiencing a clear turnaround in interest rates: Since Christmas 2021, the strongest increase since 1999 can be observed in the construction interest rates. Compared to the beginning of the year, the interest rate level has almost tripled for a commitment of ten years, according to Interhyp (as of mid-June 2022). This development is causing concern for home builders. We clarify how justified these are.
Why are construction interest rates rising so rapidly??
Various reasons play a role. Building interest rates are also based on the returns on the capital market. The generally rising interest rate level in the entire euro zone is thus playing a role. An indirect trigger for rising construction interest rates is advancing inflation. This puts pressure on central banks such as the ECB to rethink the loose monetary policy that has been in place for years. While the U.S. Federal Reserve has already raised its key interest rate, the ECB has not taken this step after its meeting on 9. June in July to expect. Then the key interest rates are to be raised by 0.25 percentage points. Added to this are economic uncertainty factors such as the Ukraine war or lockdowns in China that are damaging to supply chains. These influences are causing nervous financial markets.
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The presentation of the interest rate development is based on the actual and daily updated conditions of Volksbank Stade-Cuxhaven eG and partners of Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken. This is not a binding financing proposal.2022-12-03
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The consequences of rising construction interest rates for home builders
It doesn't take an advanced math course to realize that rising construction rates are leading to more expensive loans. Several hundred euros more per month are already possible with slight interest rate increases and terms of ten years. Mixed with the high prices for building materials, electricity and real estate, some households are at risk of having to at least postpone the construction project. In the worst case, the trend intensifies so that not everyone willing to build can afford financing – not a conducive scenario given the tight housing situation. There is a threat of a decline in demand for residential real estate, which would represent an acid test for the stability of the real estate market. Depending on how you look at it, this could have the positive effect of easing real estate prices over the next few years.
In order not to be even more seriously affected by rising construction interest rates, loans have been even more expensive since the beginning of the year than they already are. The Landesbausparkasse Bayern, for example, approved over 70 percent more money in loans in the first third of 2022, according to its own statement. Banks have therefore been urged by the financial supervisory authority Bafin to pay meticulous attention to the equity capital brought along by the borrowers. This is to minimize the risk of non-payment.
What to do now?
First of all, it is important to remain calm. The purchase of a property must be well considered. No one should be driven by rising construction interest rates in a hasty purchase decision. It may even make sense to first "only" secure a plot of land and then build on it with some delay. It is essential to take into account any building commitment. Some land must be built on within a certain period of time after purchase.
Of course, it is a human reflex to want to secure as low an interest rate level as possible. Due to inflation, it may make sense to invest in real assets. However, it is advisable to think about a higher initial repayment and a longer fixed interest period. In the Genossenschaftliche FinanzGruppe up to 30 years are possible. One building block can be a building savings contract with the (still) particularly advantageous conditions of Bausparkasse Schwabisch Hall. Who already possesses a financing and before a credit extension stands, should think promptly about a follow-up financing at the present interest level. One possibility is the forward loan. This can secure favorable interest rates up to five years in advance.
In which direction the building interest rates will develop in the future?
Due to the very dynamic world situation, valid forecasts are complicated. The second decimal place of the construction interest rate changes almost daily. However, experts tend to expect values to continue to rise. In the summer, with a ten-year fixed interest rate, the three percent mark is likely to be cracked. In view of the expected further interest rate hike by the U.S. Federal Reserve and the 0.25 percentage point interest rate hike announced by the ECB for July, this appears realistic.
The fact that construction interest rates of almost ten percent, as in the 1990s, are not to be expected at present is a source of hope. Despite rising interest rates, credit burden ratios (the ratio of spending on interest and principal to disposable household income) were much higher in the 1970s and 1990s. With the right steps and adequate advice, construction financing is still possible in the current situation. Therefore, please feel free to contact me or my colleagues. I look forward to talking to you!
Construction financing specialist of Volksbank Stade-Cuxhaven eG