The ten-year Bunds are now approaching 3%.
German borrowers hoping to lock in a reasonable lending rate for a house or apartment purchase are bracing themselves for a further blow this week, when it is expected that their borrowing rate could hit 5% as a result of the recent rise in bond yields.
Bond yields are effectively what determine the level at which banks will lend to corporate or private borrowers for real estate investment, rather than the level of the European Central Bank's key interest rates. The ten-year Bunds are now approaching 3%, while the yield on ten-year US government bonds rose to more than 5% for the first time in 16 years.
Of course, other factors also have an impact on capital market interest rates, on which construction interest rates depend. Competition among the banks, inflation expectations on the bond markets, the overall economic outlook, capital market interest rates in other currency areas, and investors's need for safe investors are all contributing factors.
German banks refinance their lending by issuing Pfandbriefe, or covered bonds, with the real estate serving as collateral. These Pfandbriefe are deemed to be as safe as government bonds, which is why yields move in parallel. The markets are building in the idea of key ECB interest rates remaining at their current level, or even slightly rising.
If they DO rise, the government would have to issue new bonds with higher interest coupons to attract investors. This makes older bonds with lower coupons less attractive, which are then sold, pushing down prices and increasing yields.
October 2022 saw interest rates peaking, having surged from under 1% before the Ukraine war to over 4%, before stabilising at a slightly lower level. For financing with a term of ten years or more - fairly typical in Germany - the current range is between 4% and 5.4%, depending on equity and creditworthiness, averaging at 4.2%, according to FMH-Finanzberatung, a financial advisory.
Mortgage advisor Dr. Klein also points to a change in the level of average LTV's now, compared to a year ago. In August this year the average LTV was 85.45%, compared to 80.71% in September 2022 - a full five percent lower. This lower equity that buyers are putting in means more risk for the lending bank, which means higher interest rates for the borrowers.
The consumer platform Biallo, which gathers data from the banks on their lending activity, puts the prevailing level of interest rates at a 12-year high. The high level of rates has surprised many observers, who thought they wouldn't be allowed to rise above 4%, and were certainly showing resistance to move in lockstep with the ECB's rate rises, including its most recent 25 basis point rise in September, its tenth interest rate hike in a row.
These higher rates are, of course, bad news for those hoping to buy property, who in any event are likely to face heightened scrutiny from any bank considering offering them a mortgage. The ECB's current mantra of "Higher for Longer" is not encouraging for those who are hoping interest rates will fall any time soon. If eurozone inflation persists, another small ECB rate rise can't be ruled out.
Last month the ECB increased its inflation forecasts for 2023 and 2024, largely based on higher energy prices and wage growth pressures. This doesn't augur well for any imminent rate cut of the sort that will help German borrowers.
