The Czech National Bank (ČNB) continues to cut interest rates, and good inflation results indicate that it will likely continue to do so. We asked four experts how this will affect mortgage interest rates.
In the survey, he answers us:
Martin GurtlerKomerční banka economist
Vít HradilChief Economist at Cyrrus
Libor Vojta Ostakeka mortgage specialist at Broker Trust
Jiří Sýkormortgage analyst at Swiss Life Select
We ask:
1) CNB continues to reduce interest rates. How do you think this will affect interest rates for mortgages in about half a year and about a year, unless there is some unexpected event that could significantly affect the economy?
2) How do you think consumers whose mortgage fixation will end in the foreseeable future (e.g. within three months) should behave? Do you think they should choose shorter fixations?
3) We are seeing opinions that mortgage interest rates will not return to their lowest levels of previous years and that their “new normal” will be higher. Do you agree? If so, why is this and at what levels might mortgage rates stabilize and when (barring unforeseen events)?
4) Do you think that the drop in interest rates will have a positive impact on the availability of housing, or should Czechs accept the fact that real estate will remain expensive and owning your own home will not be the standard it used to be?
The CNB continues to lower interest rates. How do you think this will affect interest rates for mortgages in about half a year and about a year, unless there is some unexpected event that could significantly affect the economy?
Martin Gurtler: Mortgage rates more than the current level of short-term CNB rates reflect the price of money in the longer term. Among other things, these also depend on expectations regarding the CNB’s next steps, but other factors, such as global developments, also play a role.
In general, however, the reduction of CNB rates should translate into lower interest rates on mortgages. By the end of the year, financial markets currently expect the two-week repo rate to fall to 3%, which is too optimistic in our view when we expect the repo rate to fall “only” to 4%.
Currently, compared to interest rates with longer maturities (interest rate swaps), mortgage rates are significantly higher. However, with the gradual decline of short-term rates, and therefore cheaper short-term funding for banks, and the stabilization of interest rate swaps at current lower levels, mortgage rates should also decrease more significantly. Mortgage bid rates, currently averaging around 5.6%, could fall closer to 4% over the course of the year.
Vít Hradil: Mortgage loan rates, with a little simplification, reflect the opinion of the financial market on the policy of the CNB in the coming few years. That is why mortgages began to become slightly cheaper already at the beginning of 2023, i.e. long before the CNB lowered interest rates for the first time. This development will almost certainly continue in the coming months as, after a period of struggling with rampant inflation, the market anticipates that the next few years will be considerably more “normal”.
Libor Remainder: Mainly short-term money will decrease, i.e. mortgages will be affected by fixing for one year and up to 3 years. Within half a year, the majority of mortgages will be below 5%, rates starting with four will prevail. Within a year there is a real chance that rates starting with a three will begin to appear.
Jiří Sýkor: Mortgage rates are expected to decline throughout the rest of the year. Rather, the question remains at what value these rates will stop at the end of this year.
In your opinion, how should consumers whose mortgage fixation ends in the foreseeable future (e.g. within three months) behave? Do you think they should choose shorter fixations?
Martin Gurtler: We assume that the interest rates of longer maturities, the development of which is essential for the setting of mortgage rates, already have limited room for further decline. The question remains, however, with what speed and intensity mortgage rates will begin to reflect lower market interest rates.
Given that the amendment on consumer credit, which introduces penalties for early repayment of mortgage loans, will not come into force until September this year, consumers can also rely on the possibility of cheaper refinancing through shorter fixations in the event that rates fall even more . However, due to banks’ concerns about refinancing, mortgage loans with longer fixations may remain more expensive. However, the choice of fixation depends on a number of other factors.
Vít Hradil: Personally, I think there is no point in being too tactical. Chaining of fixations, for example by combining a one-year bond followed by a five-year bond, is in principle a speculation on the development of rates on the financial market in the next six years. Like any speculation, this one may or may not work out. So, if someone feels that he follows and understands the financial market to the extent that he can “outsmart” it, let him speculate. For most ordinary people who do not study the financial markets in their free time, this is, of course, an analogy of betting on roulette, with all the risks involved.
Libor Remainder: Yes, shorter fixation, for one year, maximum up to 3 years in length.
Jiří Sýkor: In the event that someone’s fixation period will end in a short period of time, they should choose a shorter fixation option, e.g. 1, 2, or a maximum of 3 years. Nowadays, it is definitely not worth choosing long fixations (if the bank still has them on offer).
We are seeing views that mortgage interest rates will not return to their lowest levels of previous years and that their “new normal” will be higher. Do you agree? If so, why is this and at what levels might mortgage rates stabilize and when (barring unforeseen events)?
Martin Gurtler: It is highly unlikely that mortgage rates will return to levels well below the 3% we saw in the previous decade. This is also indicated by the central bank itself, according to which the neutral interest rate is still hovering at 3%, which should also determine the level of rates with longer maturities in the medium term. However, this does not change the fact that mortgage rates still have considerable room for a significant drop. Mortgage rates could move as high as 4% if we consider the simplistic relationship between mortgage and market interest rates. However, even this would probably represent a significant impetus for a stronger revival of the mortgage market.
Vít Hradil: Yes, I agree that a period of such low rates is unlikely to return anytime soon. The ultra-low rates at the time were caused by persistently low inflation, which central banks tried to revive with near-zero rates. However, it seems likely that the factors behind extremely low inflation were temporary and have largely passed. So inflation is apparently coming back into play and with it higher interest rates. “Normal” mortgage rates could thus be around 4%, for example.
Libor Remainder: I agree with this. The decade of extremely cheap rates is over with 2021. Rates could stabilize in the 3-5% range. Money has its value and this interest rate range is very acceptable in the long term. However, if things do not change, the future is open.
Jiří Sýkor: Here we get to the philosophical level of what is “normal” at all. But to come back to the question, it is true that rates below the 2% level were somewhat unusual and it is highly likely that we will not return to these values anytime soon. There is talk across the market, and I agree, that rates between 3-4% will be the new standard. Of course, we will definitely not reach these rates this year, but we could expect them in the course of 2025.
Will you be buying real estate in the foreseeable future?
Do you think that the drop in interest rates will have a positive impact on the availability of housing, or should Czechs accept the fact that real estate will remain expensive and owning your own home will not be the standard it used to be?
Martin Gurtler: The drop in interest rates will significantly improve the availability of financing for the purchase of real estate, and the relaxation of DSTI and DTI limits from last July and this January will also contribute to this. In addition, housing affordability through the lens of the property price-to-income ratio has already improved significantly, thanks to a combination of a slight decline in property prices and rising wages. However, this only partially corrects the significant deterioration in the affordability of own housing due to the previous significant rise in real estate prices. This year, we expect the growth of real estate prices to resume, however, in our opinion, nominal wages will grow faster.
Vít Hradil: A fall in rates will automatically lead to an increase in property prices as it increases demand. This will affect the availability of owner-occupied housing individually, depending on the situation of each buyer. Those who buy without a mortgage will have to deal with higher prices and therefore affordability will drop for them. On the contrary, despite the higher prices, a cheaper mortgage may allow some people to enter the market at all, and from their point of view, availability will therefore increase. Overall, I assume that real estate in the Czech Republic will remain relatively expensive, as the state is doing everything with a flood of regulations to make it impossible to build.
Libor Remainder: The price level of real estate is very high in our country and there is no prospect of real estate becoming more affordable. Interest rates will improve the situation as they fall, but unfortunately we will not return to the affordable housing we had here before covid.
Jiří Sýkor: It can be expected that the arrival of lower mortgage rates will go hand in hand with a further increase in real estate prices, so I would not expect any significant revival of the mortgage market. On the other hand, the desire to live in their own property will probably remain in the minds of our people.
2024-03-16 03:51:41
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