The financial market is at a turning point. All around the world, inflation is prompting capital to shift. The key interest rate is rising, making loans more expensive again. But at the same time, money in people’s bank accounts continues to dwindle. Keyword: negative interest rates. What’s the connection?

This is where complicated coupling mechanisms play a role. And they all lead to the same result: Anyone who is thinking of investing in a relatively high value property should act today. Regardless of whether they are looking to safeguard existing capital or invest money at favorable terms for future returns – via the mortgage-financed purchase of a property.

The current inflation situation: A curse and a blessing for the market

The global economy is shifting from the threat of deflation, which has been successfully averted, to the opposite. After remaining at a fairly low level (0–2%) in previous years, inflation rose steadily in 2021. In December, the rate of monetary devaluation hit a new high of 5%. Over the year as a whole, inflation averaged 3.1%. This is not only due to pandemic-related shortages, but above all to rising energy prices – caused by geopolitical flashpoints and general increases in the price of fossil fuels.

However, there is no reason to panic. After all, the market is subject to intelligent regulatory mechanisms. Just as the previous low-interest policy promoted investment through favorable loans, moderate inflation boosts the economy. This is because as money steadily loses some of its value, people intelligently realign their purchasing behavior. To prevent inflation from rising further, central banks raise their key interest rates. Money becomes more expensive, which counteracts price increases. And as a result, inflation is again expected to weaken slightly.

The key interest rate: Moderate increases create a powerful tailwind

Central banks are taking action to counter inflation. They are talking about raising interest rates – and this is where things get interesting. The U.S. Federal Reserve has already restored its key interest rate to positive territory (as of January 2022: 0.25%), while the ECB’s rate is still stagnant at 0% – but is expected to rise again in the near future. Financial markets react very sensitively to such movements. Trend reversals become immediately visible on the stock markets – and thus also very soon in the yields on government bonds.

Ten-year German bonds, for example, have been in negative territory for some time, but have recently picked up noticeably and are also likely to turn positive in the very near future. A year ago, the rate stood at -0.55%; currently it is -0.11%. This in turn has an impact on what banks have to pay to borrow on the markets. And if borrowing costs for banks rise, they automatically rise for bank customers too – which brings us to the direct impact on private financing.

Lending rates: Rising in the short and medium term

Construction interest rates are therefore directly linked to rising yields on government bonds. With the usual bank markups, they are currently already at around 0.95% for a 10-year mortgage. Doesn’t sound like much. But what matters is the relative increase in recent months: Since bottoming out at around 0.4% in December 2020, mortgage rates have more than doubled.

This trend will continue for the time being: A further increase is expected in the coming months – by up to 0.75%. That means an increase of at least half. And that’s just for starters. Anyone planning to finance a real estate purchase in the medium term would be well advised to accelerate their timetable. Because by signing a loan agreement now, you are also locking in your interest rate now – and protecting yourself from future rate rises.

Outlook: Waiting is not a smart option

Economists are basing their forecasts on two likely scenarios: In the first, interest rates continue to rise steadily in order to further stimulate investment. In the second, interest rates on government bonds are un able to rise further in the medium term, as many countries are already highly indebted as a result of the coronavirus crisis and would otherwise be threatened with bankruptcy.

Is it worth waiting? There is some debate. But there is unanimity on the crucial point: an interest rate decrease from today’s rates is not to be expected anytime soon. Anyone who wants to secure a low interest rate is running out of time. Now is the time to strike.

Interest on capital: Expected to remain negative – and loss-making

The situation is somewhat different when it comes to interest rates on savings. These will not rise in the medium term, having recently slipped into negative territory. Corporate customers already pay a “custody fee” of 0.5% on their capital, and for retail customers fees have been or are being introduced – in some cases on deposits as low as €25,000, and for existing customers from around €100,000, depending on the bank.

The reason: Interest rates on capital are not linked to government bonds, but to the key interest rate of the ECB itself, which controls everything but acts much more slowly than the capital market. According to the head of the ECB, Christine Lagarde, no increases are expected this year. In addition, the impact of financial market interest rates only feeds through to regular bank accounts with a significant delay.

According to the trade press, positive interest rates are not expected for another 2–3 years. Until then, a lot of money will be lost. And if you factor in the loss of value due to inflation, it will be almost impossible to recoup.

Real estate: A promising investment to secure money and the future

To prevent your money losing value, you either have to invest it on the financial market or tie it up in property. Real estate is less risky than other investment assets. Opportunities and risks are ideally balanced, and inflation also makes them even more attractive for retirement planning. This is because rents rise in line with the general increase in prices. Thus, you can achieve better returns without expanding your portfolio.

The Berlin market continues to offer attractive conditions for owner-occupiers. It is a well-known fact that purchase prices have more than doubled within the last 10 years. In 2021, they gained another 10%. As a reminder, during this time there was no interest on bank capital and a money lost 3.1% of its value. A handsome difference. And given the tight market, combined with growing purchasing power, the forecast curve is quite likely to continue pointing upward.

Financing: The relationship between equity and loan capital

Tying up equity and financing property – they usually go hand in hand when buying real estate. And currently, combining the two is a very sensible idea for safeguarding value. But in what proportion? The simple answer: the more equity, the better. The faster the investment is paid off and the greater the return on the capital invested. At the end of the loan term, the money from the rental income – or the monthly instalments you are saving – goes straight into your own pocket.

But: Since everyone pays for a property throughout their lifetime – either via the renting you pay to a landlord or by buying your own property – financing with a low equity ratio can also be highly attractive for owner-occupiers. Often this is only 11%, which at least covers the ancillary costs – ideally it is 20% or more. A term of 30 years is usual for fixed-interest mortgages. The shorter the term, the more favorable the conditions.

In contrast to owner-occupiers, investors should finance for 20 to 25 years – with a higher personal contribution. The percentage of invested assets should be set so that the rental income at least covers the repayments, including the interest on the loan. This results in a good return on equity – i.e. the highest possible increase in value.

Invest now: Get advice!

David Borck Immobiliengesellschaft not only brokers real estate, but also supports buyers in financing and investment issues. In doing so, we work together with professionals from the financial sector, always have our finger on the pulse of the market and can provide expert advice.

Which property best suits your individual financing plan? To secure your personal future? Or to invest your existing assets?

Our team will be happy to assist you. For general questions or individual consultations, you can reach us at any time at +49 (0) 30 887 742 50 or service@david-borck.de

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David Borck Immobiliengesellschaft

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