Uncertain Times: How Does it Affect my Home Buying Journey?

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Dr. Christian Mulder

Mar 1, 2022
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Inflation is rearing its head. Banks are tightening loan conditions. We are also in particular worried if not shocked by the developments of the last week in Ukraine. Apart from the fact that we of course ask ourselves as humans how we can help, we have also thought about what it means for you from a customer perspective. So we have summarised our thoughts on the situation. What is the impact, especially on housing and interest rates? Is it even advisable to continue pursuing our dream of owning a home at the moment? Please allow us to give you some perspective:

Impact on mortgage interest rates

You have seen quite significant jumps in rates since the end of last year. The main reason is that inflation has increased well beyond what market participants had been expecting. Serious observers like Larry Summers (former United States Secretary of the Treasury) agree that the central banks are behind the curve, and will eventually have to raise rates. The bond market is anticipating this and rates are therefore already increasing.

Banks are nervous

Banks operating in Germany have received clear signals from the regulator BaFin to be more selective in extending real estate loans, and as a result banks have increased the margins that they charge over the interest rates observed in the bond market. Some banks are overreacting in our view, tightening conditions beyond the reasonable, and it may take some time for them to resort to more normal business practices.

War and crisis in our immediate neighborhood

We now have a war on the EU's doorstep. When Corona arrived we told our customers to keep a cool head, that prices would not go down. Now again, we would advise the same: No matter how much the war may frighten and disturb us personally, there is no fundamental change in the housing market. Interest rates, however, may see a temporary dip depending on the depth of the conflict.

The economic logic for this short-term dip in rates, that is occurring as we are editing this piece, is that in times of uncertainty money looks for a safe haven, which are government bonds, and these are the basis for mortgage rates. Moreover a war like this leads to uncertainty, that typically halts some spending plans (corporate investments, holiday plans etc) and hence less pressure on prices.

Addition March 14: Now almost 2 weeks later we see interest rates shooting back up. The Ukraine war has led to high oil, gas and grain prices over this period. This is leading to higher inflation and firmer actions by central banks to raise interest rates.

We trust this provides you some background to the bank behaviour you see and interest offers you may receive.

Do not hesitate to reach out to us to talk about your personal options or current questions.

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Dr. Christian Mulder

Dr. Christian is a former Senior Economist and Manager at the IMF and World Bank. He is a Hypofriend Co-founder.

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