Navigating Interest Rate and Real Estate Price Developments: Tips for Property Buyers

Increase in the ECB interest rate

The increase in the key interest rate by the European Central Bank also has an effect on the interest on loans and deposits in Germany. On March 16, 2023, the Governing Council of the ECB pushed through another interest rate hike, which resulted in key interest rates rising by 0.5 percentage points.

The key interest rate is currently at 3.5 percent in the euro area and is to be increased again to 3.75 percent at the beginning of May become. In view of the years of zero interest rates, this is a remarkable development. Since the ECB sets the key interest rate for the euro area, its decision has an impact on the interest rate level in Austria as well as in neighboring Germany: consumer loans and mortgage lending are becoming noticeably more expensive.

Is now the right time to buy a property?

Anyone who is toying with the idea of ​​buying a property may have doubts in view of the current interest rate developments in Europe. However, there are other factors that should be considered when making a purchase decision, such as real estate price trends. Managing Director Stephan Scharfenorth von Baufi24 comments on the question of the right time as follows: “Deciding on the right time to buy a property depends on whether you are acting as an investor or owner-occupier“.

As an investor, you speculate on future price increases and market developments and thus on a future return, whereas owner-occupiers tend to consider this aspect less. For them it is particularly important that the property meets their personal needs.

These are therefore two completely different perspectives on the purchase of a property. Anyone who speculates on getting high returns with a property should pay more attention to the current developments in credit and building interest rates as well as real estate price developments. People who want to live in the property themselves, on the other hand, should pay more attention to biographical and family needs.

Current interest rate developments

In mid-April 2023, building interest levels leveled off at around 4 percent and higher, which is a significant decrease compared to the banking crisis in mid-March. However, it should be noted that the yield curve is inverse. Typically, the 5-year rate is lower than the 10-year rate.

Overall, construction loans are currently more expensive than they have been in the last ten years due to the significant increase in interest rates in the first half of 2022. Even so, an interest rate of just under 4 percent is still a long way off historic highs and should be viewed as moderate over the long term. Even taking into account the current interest rate hikes, we are currently at a building interest level that roughly corresponds to that of 2012.

As far as mortgage lending is concerned, the interest rate hikes in the current year and last year had an impact primarily on mortgage lending and home loans, as a result of which the monthly loan installments rose significantly in the past year. In particular, existing variable loans without interest rate hedges were affected.

However, there is good news for consumers in Austria who would like to apply for mortgage lending in the coming months: Mortgage financing can be concluded with a fixed interest rate of up to 25 or 30 years. With very low surcharges, loans for an apartment or house can be taken out at comparatively favorable conditions over the entire financing period and offer optimal security for your own four walls.

Profiteers of the increased credit interest

But there is definitely a good side to the current rate hikes. Since credit interest rates have also risen, savers who park their money in call money or fixed-term deposit accounts can benefit in particular. Savers can currently earn up to 3.6% interest per year if they park their money in a three-year fixed-term deposit account.

In view of the negative interest rates in the past, some savers will be happy here. Savings book or current account savers, however, often hardly notice anything about the promising interest rate increases. Changing banks may be worthwhile here. However, it should also be noted that even the increased interest rates cannot compensate for the inflation rate. If you want to combat inflation in the long term, you should therefore consider investing your money in investments with higher expected returns.

And what about the future?

Predicting the future of interest rates is difficult, if not impossible. Long-term forecasts of interest rate developments, which relate to the next 10 to 20 years, for example, are extremely speculative and basically dubious. The capital markets are far too volatile and unforeseeable events such as the corona pandemic can completely refute forecasts from one day to the next.

Real estate price developments in Austria and in neighboring Germany

Anyone who is flirting with the purchase of a property should of course not only the current interest rate developments, but also take real estate prices into account. Real estate prices continued to rise in Austria in 2022, both in urban centers such as Vienna and in rural areas. However, the rate of price increases slowed down somewhat in the second half of the year and this trend is expected to continue in 2023.

This suggests that demand is easing, which real estate agents have been observing for several months. Inflation, higher interest rates and tighter credit requirements are limiting financing options, especially for those on a tighter budget. As a result, properties in unattractive locations and those with poor energy balances are particularly affected by a drop in demand and stagnating or falling prices.

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However, it is important to note that real estate prices are still at a high level. It is also important to differentiate between new construction and existing properties: there is currently no price reduction in sight, especially in the new construction sector.

This is mainly due to the high raw material prices, the difficulties in the supply chains and the lack of qualified specialists. In addition, since January 1, 2023, the requirements for the climate neutrality of new buildings have been tightened even further. In addition, the standard is to be increased again from 2025. All of these factors drive prices up.

Conclusion

Interest rates are therefore tending to rise, while real estate prices are stagnating or even falling slightly. But in addition to the current developments in interest rates and real estate prices, there are also some individual factors that should be taken into account when making a purchase decision. This includes the personal, financial situation and future life plans.

However, the development of market conditions is certainly also decisive. What consequences you draw from the current developments is ultimately a personal decision that you should definitely think carefully about.

Further current information from Finanz.at:

More information: real estate prices

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Editor-in-Chief, Head of Tax and Finance Department

Daniel Herndler is a business journalist, publisher and editor-in-chief of the news portal Finanz.at. His focus is on tax, finance and economics.