The past few years have been quite stressful for those interested in real estate. First, many were overwhelmed by the explosive price increases in residential property since the financial crisis. Then came an unprecedented increase in key interest rates by the European Central Bank (ECB), which at its peak led to a quadrupling of building interest rates. The result: not only were real estate prices in some cases twice as high as they were 10 or 15 years ago, but the costs of capital servicing, i.e. the amount that has to be transferred to the bank in the form of repayments and interest on debt when buying a house or apartment with the help of a bank loan, also multiplied.
When is a property affordable?
This led to frustration and uncertainty among potential home buyers. Interhyp, Germany’s leading broker of private mortgages, examines the mood among those interested in real estate every year. In their 2023 affordability study, the experts found that every second person surveyed perceived the real estate market as “overexcited or overheated”. A property is considered “affordable” if it is within the financial means of a potential buyer. This was apparently no longer the case for more and more people who wanted to fulfill their dream of owning their own home. The hurdles turned out to be too great, as did the external circumstances, such as pandemic-related job insecurity, the energy crisis and high inflation.
Falling prices and interest rate reversal provide confidence
In the meantime, the signs have turned around and optimism prevails among citizens who are considering buying their own home. The Interhyp affordability study for 2024 shows that more than half of those surveyed now rate the affordability of a property in their region as “medium” or “easy”. Compared to the previous year, the number of confident respondents has increased by nine percentage points. Those who are already on the verge of making a purchase and want to complete it in the next one to two years are even more positive: For 56 percent of these respondents, a regional property is “medium” to “easy” affordable, an increase of twelve percentage points compared to the previous year. “We can see in the study results that more Germans are feeling encouraged to pursue the dream of owning their own property,” said Jörg Utecht, CEO of the Interhyp Group.
The reasons for the growing confidence are obvious: Real estate prices have fallen significantly in some cases over the past two years. In addition, in June 2024 the ECB cut key interest rates for the first time in five years. Even if this is only a homeopathic reduction of 0.25 percentage points to 4.25 percent, after a furious rise from 0 to 4.5 percent between July 2022 and September 2023, construction interest rates have already reacted to the long-awaited and now ushered in interest rate turnaround. According to Interhyp figures, construction interest rates for loans with a 10-year fixed interest rate peaked at 4.23 percent at the end of 2023; today they are 3.39 percent. With further key interest rate cuts by the ECB, interest rates for real estate loans could also fall further. In the past two years, “the real estate market has rarely been as attractive as it is now,” says Interhyp CEO Jörg Utecht.
Equity is a problem for many citizens
However, it is too early to speak of a buyer’s market for real estate. The sharp interest rate increases by the central bank have had another effect: banks have become much more restrictive when it comes to granting real estate loans. On average, German home buyers bring around 20 percent of their own capital to cover additional purchase costs and down payments. Loans with lower equity ratios and thus a higher loan-to-value ratio are often significantly more expensive in terms of interest rates because they represent a higher risk for the bank. This means that if the dream property costs 500,000 euros, a potential buyer must first put 100,000 euros on the table to get an attractive interest rate or to get the loan at all – for families, households in the lower and middle income segments or for young people who have only been working for a few years, this is an almost insurmountable hurdle.
Some experts are therefore already warning of a two-class society: top earners, heirs and citizens who already own paid-off properties can raise the necessary equity to benefit from the lower property prices. Everyone else will miss out. As a result, it is feared, social inequality will also grow. But it does not have to come to that, says Björn Pätzold, who advises customers at the real estate loan broker Dr. Klein in Mettmann on questions of building finance. Equity is indeed the linchpin for financing your own property. But there are a number of ways to meet the increased requirements of the banks. Getting support from family is one of the best options, says Pätzold. This can be done through a gift or an internal family loan with a repayment agreement, but also through the registration of a mortgage on a property that has already been partially or fully paid off.
Save a lot of money through a “muscle mortgage”?
Another option is the so-called muscle mortgage, i.e. manual work that borrowers, family members or friends can perform. “As a rule, around five to ten percent of the purchase price or renovation costs are recognized as personal contribution,” says Björn Pätzold. “But there are also banks that accept muscle mortgages of up to 50 percent. In that case, however, a professional must confirm in writing that the builder has the necessary skills.” In addition, the total loan could be split between the spouses, for example, which would enable two loans with different terms. The loan with the shorter term would be rewarded with a lower interest rate, while the loan with the longer term would be the secure anchor of joint financial planning.
