Rapid interest rate increases for loan financing since 2021 put a temporary end to the rise in residential property prices from mid-2022

“Until two and a half years ago, historically low mortgage interest rates prevailed, fueling a real estate boom. The interest rate turnaround in 2021/2022 then triggered a reluctance among prospective buyers to purchase real estate: Since the significantly higher interest rate level massively increased the total costs of purchasing real estate, many classic buyers, who traditionally financed with a high proportion of borrowed capital, had to put their dream of purchasing real estate on the back burner. Over time, real estate sellers had to admit that they could no longer enforce their price demands without a reduction,” says Prof. Stephan Kippes, head of the IVD market research institute, assessing the purchase market situation. “However, the noticeable price drops alone were not able to significantly boost general demand; only now have the financing conditions that have improved in the last few months managed to do so, thus creating a slight sense of optimism on the home ownership market.”

The IVD market research institute has analyzed the interaction between housing loans and purchase prices for existing condominiums using Munich and Stuttgart as examples. The two charts show the interactions very clearly.

The era of cheap money came to an end in 2022, and since then prices have fallen significantly in Munich and Stuttgart. On July 21, 2022, the European Central Bank (ECB) raised its key interest rate by 0.5% for the first time in more than six years. Since then, there have been ten further increases, so that the key interest rate most recently rose to 4.5% in September 2023. Since then, the ECB key interest rate has remained at a constant level, and an interest rate cut could follow for the first time from June 2024.

The interest rate on housing loans (average effective annual interest rate) has risen again since the end of 2021 – after a long decline – in particular the effects of the war in Ukraine have driven inflation, forced central banks to pursue a tight monetary policy and thus triggered the rise in mortgage interest rates. While housing loans were still at 1.30% in 2020 and 2021 (average annual interest rate in each case), they rose rapidly to 2.57% in 2022 and further to 4.06% in 2023. Since December 2023, construction interest rates have fallen continuously and reached 3.88% in March 2024 (total value for the first quarter of 2024: 3.90%).

The interest rate turnaround in 2021/2022 was followed by reluctance among prospective buyers to purchase real estate, which continues to this day. In the meantime, purchase prices for residential properties have fallen significantly in many places, for example in the southern German state capitals of Munich from €9,475/m² in 2022 to €7,600/m² today and in Stuttgart from €5,850/m² in 2022 to €5,000/m² today. An improved financing environment could provide new impetus in the coming months: A combination of tax incentives and a variety of funding programs as well as the slightly lower mortgage interest rates could help to make residential property investments more attractive again.

Source: IVD South