Construction money interest rate development 2010 to date

Analyzing the last 10 years, it can be seen that the construction money interest rate development has a special influence during this period. Not only what concerns the interest rate. Also the purchase and financing behavior changes. Many regularities of the 2000s and the decades before are no longer valid today. The real estate market – and thus construction financing – is affected by new developments that will continue to have a lasting impact on buyer behavior and lending in the future.

The construction money interest rate development of the last 10 years has never been like this before

At the beginning of this rapid development there was a crisis: When the credit business in the USA collapsed in 2008/09 in connection with the Lehman bankruptcy, this triggered a global financial crisis. As a result, monetary authorities felt compelled to offer low interest rates in order to stabilize the global economy and force lending and stimulate consumption through cheap money. While 3.9 interest rates for a construction loan in 2010 with a 10-year fixed interest rate and 20 percent equity was already a very favorable offer, today offers below one percent are the rule.

The German real estate market has stagnated since the 1980s. Germany was – in contrast to other European countries, a pure tenant market. Home owners were the minority. The government did try to increase the homeowner rate; but to no avail, in my opinion. And this although the real estate prices at that time were actually favorable in international comparison. Property buyers have been between 40 and 50 years old for decades, with fixed interest rates usually no longer than 10 years, while the repayment rate has averaged closer to one than two percent.

These regularities had actually long time existence; a crucial turn can be determined only in the last 3 years. Real estate financiers will become decisively younger, asTilgungssatz rather four as three per cent is selected and also the credit terms extend on the average on 15 years. All this is due to the construction money interest rate development of the recent past.

The development of interest rates for construction has an impact on real estate prices

Ever falling interest rates boost demand for real estate. If the average purchase price including ancillary costs of a financed property in 2010 was between 250.000,- to 290.000,- Euro 277.000 euros, ilag this 2019 already at over 409.000 and will have risen again to over 430 euros by summer 2020.000,- Euro increased. There are still regional differences in price trends – and even regional price declines – but the overall trend in 2020 is still upward.

The low interest rate environment of the last 10 years has fueled demand for real estate. However, it will also lead to a significant increase in purchase prices and loan amounts. The interest rate level for construction financing is only about a quarter of what it was ten years ago. These very low interest rates for real estate financing allow affordable monthly loan installments. Thus the credit terms become clearly longer. Another reason why borrowers are currently getting younger and younger. Despite higher prices, real estate remains attractive for owner-occupiers and investors alike.

Anyone who needs follow-up financing today because the initial loan is due to expire can be particularly pleased. Homeowners with existing loans benefit particularly from the low interest rate phase. And they use the interest savings to reduce their debt. The initial repayment on follow-up loans has risen from an average of 3.6 percent in 2010 to 6 percent today. With an interest rate of currently one percent, this means that the loan is paid off nine years early.

Why Covid 19 can't hurt demand for real estate

In the corona crisis, the already high demand for real estate and financing increases seen. In April, shortly after the all-time low in construction interest rates and at the beginning of the Corona crisis, a particularly large number of construction loans have been concluded. This high demand will continue in the fall of 2020. The Corona crisis has increased the focus on people's own housing situation. The desire for one's own home, for the associated security and asset protection has clearly grown. The clear majority buy or build a property to live in it themselves. These private inquiries rise in contrast to commercial and investment-related inquiries. However, there has been no major change here compared with the previous year 2019.

In view of the high purchase and loan sums, buyers today are paying more attention to security-oriented financing than ten years ago – with higher repayments, longer fixed interest rates and higher amounts of equity. Real estate buyers and builders today place particular value on security in financing. This security is determined in particular by three factors: high initial repayment, high equity ratio of at least 20 percent and longer fixed interest rates. Particularly with the own contribution the tendency shows up: had builders and buyers 2010 somewhat more than 80.000, in 2020 it will already be more than 110.000,- Euro.

The Corona crisis also means that those interested in mortgage financing want to keep the monthly charges within reasonable limits. That's why flexible loans are particularly in demand: the possibility of repayment rate changes and installment adjustments during the term of the contract, in order to be able to adjust the installments accordingly in the event of a drop in income or a higher income. Interesting also: ultimately, the average rate today is around 1050 euros per month. In 2010, it was around 925 euros, only 125 euros less, despite higher redemption today. These low monthly installments despite higher loan amounts are made possible by the increased equity ratio and low interest rates.

Construction interest rate trend for 2021 – still stable

The interest rate environment remains favorable. The loose monetary policy of the central banks and the continuing demand for long-term bonds and Pfandbriefe are supporting the low interest rate environment. Whether the demand for real estate will remain so high and to what extent the prospective buyer will be able to afford a property and a loan, however, depends not only on the low interest rate. Above all, the further economic development in Germany and the associated income expectations will be decisive factors. It is also a fact that the intensive demand for real estate purchases observed in the last 3 years was also fueled by the income increases of the past years, which many employees had to record. Currently, we can assume that demand for real estate and financing will remain high. Long-lasting problems would dampen demand. Nevertheless, current trends show that the real estate market is robust and that real estate continues to be attractive as a crisis-resilient investment vehicle.

The opportunity is favorable. Finally found the property or building plot of your dreams? Can be financed in the Corona crisis but safely?