The Impact of Rising Interest Rates on the Housing Market: Decreased Construction and Sales

The fact that significantly fewer people can build a house or buy an apartment due to the sharp rise in interest rates is not only noticeable among brokers and construction companies. Notaries also seal fewer contracts than before the war-related price increases. A notary from Waiblingen reports on a few appointments for certifications that were canceled at short notice. In the end there was at least a little relaxation.

Less is being built and less is being sold

As a result of the Ukraine war, the prices of energy, food and many other products have skyrocketed. In order to curb inflation, the European Central Bank has gradually raised interest rates. As a result, the interest rates that banks charge for loans to private individuals are significantly higher than has been the norm for years.

Anyone who needs a loan to buy a property today therefore has to transfer significantly more to the bank every month. Many cannot afford that. Less is being built and less is being sold.

Difficult financing of loans

The situation in his office is similar to that of probably all of his colleagues, says the notary Jörg Marquardt from Waiblingen: The number of real estate purchase contracts fell “massively” in the summer of 2022. From July/August to the end of the year, the number of notarized contracts was on average 50 percent below the level before the Ukraine war and the sharp rise in interest rates that followed.

The notary, like experts from the construction and real estate industry, calls the cause the difficult financing of loans. In addition, the market prices for houses and apartments were also very high in mid-2022.

Missed appointments, short-term discounts

Last year, Jörg Marquardt also experienced “more often” that appointments in his office in Waiblinger Bahnhofstraße were canceled at short notice. Although the business was actually already in the dry cloth. “Because the buyers couldn’t get any more financing.” Bitter for both sides.

In the meantime, purchase prices on the real estate market have fallen in some cases. And since the beginning of 2023, notary Marquardt has also shown that the number of purchase contracts that he notarizes is increasing again. However, it is still a long way from the level it was before interest rates galloped.

There is an interesting observation from everyday notarial work on the purchase prices: While it happened again and again before the rise in interest rates that the price for a property was increased again shortly before the notarization date, it is now the other way around: “It may be that the order in my law firm comes in at 500,000 euros, and by the time the buyer and seller have notarized it, they have agreed on another 20,000 or 30,000 euros less,” reports notary Marquardt.

So the current situation is helping those willing to buy who have enough capital to buy without a loan. Sellers, on the other hand, sometimes have to post less than they would have received a year or two ago. And for those who cannot afford significantly higher monthly installments for a loan, which is likely to apply to many young families with children, for example, the dream of owning a home moves into the distance.

Also significantly fewer property developer contracts: construction activity slowed down

According to the notary, the same applies to property developer contracts as to sales contracts, for example when a single-family house is transferred from one owner to another. Here, too, the numbers are well below those of before the Ukraine war. Fewer contracts means less construction. So fewer new houses and apartments are coming onto the market.

Another notary from the Rems-Murr district, who does not wish to be named, reports from his office that the number of sales contracts has fallen slightly.

The “most serious” is the decline in property developer contracts, which he notarizes. From the notary’s point of view, this is due to the fact that there is much less scope for price reductions in new buildings than in existing buildings, which is the case with older properties.