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

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 expected. 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. As a result, banks have increased the margins they charge over the interest rates observed in the bond market. Some banks are overreacting, in our view, tightening conditions beyond 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 asked our customers to keep a cool head, so prices would not go down. 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.

We saw a short-term dip in interest rates as money looked for a safe haven, but since then, interest rates have kept increasing.

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 leads to higher inflation and firmer actions by central banks to raise interest rates.

Effects of the boycott of Russian oil

We are seeing interest rates that keep increasing. They have breached levels we were not expecting for this year. Why is that? The main reason is Russia's oil boycott. We had not foreseen this. This boycott is leading to oil prices that are double the prices of last year. This alone impacts 3 % of world GDP and much more in prices. On top of that, natural gas prices have tripled.

The big fear in the markets is that this inflation impulse leads to higher wages and then gets embedded in the economy. The only way to turn that around is higher interest rates, causing a (mild) recession, some unemployment, less oil use, and lower energy prices.

The impact on the housing market is likely to be that prices will stop increasing. The market has been quite out of balance, with minimal supply and double-digit increases. This will normalize. We will see much more normal supply, flat prices, and again, the ability for some bargains and fewer excessive prices. We doubt prices will decline, as the momentum was so strong and supply so tight. But this depends on interest rates. There is scope for the benchmark rates to increase to around 2% in the near future, implying mortgage rates in the rates of 3-4,5%. This will definitely dampen demand. For now, the key indicators to watch are the oil price and inflation.

We trust this provides you with some background to the bank behavior 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.