Real estate financing: What's next in the new year?

The European Central Bank has raised the key interest rate once again and holds out the prospect of further increases. What serves to fight inflation, on the other hand draws high lending rates for real estate financing and a damper on the economy.

The increase in the key interest rate took place in December 2022 only by 0.5 percent and not as originally assumed by 0.75 percent. The central bankers want to make further interest rate steps dependent on the respective "data situation" - that is, the inflation rate and the development of the economy.

After economic output had grown by more than 1.5 percent in 2022, economic output will fall by 0.75 percent in 2023, the Institute of the German Economy (IW) predicts. The Ifo Institute is more optimistic. It anticipates a milder winter recession than expected. Economic output will shrink by only 0.1 percent in 2023. The inflation rate will fall from 7.8 percent in 2022 to 6.4 percent in 2023. Both figures are significantly lower than still assumed in the fall, because they now take into account the electricity and gas price brake.

The persistently poor conditions have led to a noticeable drop in sentiment among German real estate financiers. The German Real Estate Financing Index (Difi), a quarterly sentiment indicator, has fallen for the fourth time in a row. The housing sector has been particularly hard hit by the economic situation. Financing institutions are handling lending standards more strictly.

The data analysis of the Dr. Klein trend indicator for construction financing shows that initial as well as follow-up financing was taken out in November 2022 with an average initial repayment rate of 1.98 percent. In times of higher interest rates, borrowers are increasingly choosing a low repayment rate in order to keep the monthly loan installment as low as possible. Lending institutions are again offering lower initial repayment rates and no longer necessarily expect a minimum repayment of two percent. Borrowers should nevertheless carefully examine the possible repayment: The lower the repayment is set, the longer it will take to repay the loan.

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