Oct 29th 2022 News on the topic of financing
General advantages of real estate
Real estate is a scarce commodity, especially in Tyrol, and is considered a safe investment that provides a reliable additional income when rented out. Further advantages of rented real estate are the omission of sales tax in the course of the purchase and the protection against inflation through a possible rent adjustment. Any loan interest can be claimed as an expense and reduce income taxes. Appreciation is another benefit for both rental and owner-occupied properties. In 2021, the average increase in value of new condominiums in Tyrol was 8.4%.
Developments in lending standards and interest rates in 2022.
These advantages of real estate still apply in 2022, and yet some things have changed. Firstly, on August 1, the legal lending standards (so-called KIM Ordinance; minimum 20% equity, maximum loan load 40% of monthly net income) in Austria were tightened. For more information on the KIM Regulation, see the blog https://www.tirolrealestate.com/blog/detail/die-neue-wohn-kreditregelung-2022.
On the other hand - and this blog will deal with this in particular - lending rates worldwide have increased significantly since the beginning of the year.
In January 2022, it was still possible to take out loans in Tyrol with variable interest rates - i.e. quarterly interest rates that follow an international reference rate - of around 1% or with fixed interest rates of around 2% for 20 years. Since then, interest rates have risen sharply to approx. 3% variable and approx. 4.5% fixed (effective interest rates in each case).
The background to this interest rate development is the war in Ukraine, massively increasing gas and energy prices and generally high inflation in many areas of life. Added to this are increasing disruptions to global supply chains, which had already begun as a result of the Covid crisis.
Current lending rates seem high and they are clearly higher than they were at the beginning of the year. However, it should not be overlooked that we have benefited from very low interest rates over the last 12 years following the financial crisis. As recently as 2008 - i.e. at the beginning of the financial crisis - variable interest rates for housing loans to private households in Austria were 5.5%.
The current interest rate trend must therefore also be put into perspective somewhat. In recent years, interest rates have been far too low, and at the same time they are still far below the level they were at in the past.
How will interest rates develop in the near or medium future?
Thisyear, there have already been three interest rate hikes by the European Central Bank (ECB) - in July +0.50%, in September +0.75% and in October +0.75%. Further interest rate steps are to be expected in view of the still high inflation.
The U.S. Federal Reserve (Fed) is regularly one step ahead of the ECB. Variable interest rates in the USA currently average 3.0-3.25%. At its September meeting, the Fed also announced that it could raise interest rates to a level of around 4.25-4.50% by the end of the year. For the coming year, however, the Fed then sees a stable level of approx. 4.50-4.75% and thus basically the end of further interest rate steps.
For Europe, a similar approach by the ECB can be assumed: Further interest rate hikes in the short term to curb inflation and then to reach a stable interest rate level quite quickly after all. Austrian commercial banks also assume such a development. However, this means that a possible decline in interest rates is not to be expected before 2024.
Joseph Stiglitz, the American Nobel Prize winner for economics, describes the current interest rate steps as a normalization of the interest rate situation. For him, interest rates have been exceptionally low in recent years and have therefore not reflected the true cost of capital. At the same time, he cautions that higher interest rates will not produce more gas, oil or food. Higher interest rates will therefore not solve the problem of inflation, in his view. This can only be done through structural adjustments, such as the expansion of renewable energies.
If one follows Mr. Stiglitz, then one can also expect an end to further interest rate steps, at least in the medium term: 1. because they only make limited sense in view of the (external) cause of the crisis and 2. because a great deal of investment is currently being made in Europe in order to sustainably reduce dependence on the Russian energy market.
What do the current interest rates mean for borrowers?
The higher interest rates compared to the beginning of the year mean an additional financial burden for 1. all existing borrowers with variable interest rates and 2. all new borrowers.
Specifically, the following increases in cost since the beginning of the year (for a term of 20 years):
- Variable interest (3.0% instead of 1.0%): € 560 instead of € 460 per month per € 100,000 loan
- Fixed interest rate (4.5% instead of 2.0%): € 630 instead of € 510 monthly per € 100,000 loan
This means that for each € 100,000 loan, you currently have to pay about € 100 per month (or about € 1,200 per year) more in loan installments than at the beginning of the year. For a loan amount of € 500,000, this means approx. € 500 more per month or approx. € 6,000 more per year.
In order to protect yourself against the risk of further interest rate increases, it is even more advisable today to agree on fixed interest rates for at least part of the loan. With the variable part of the loan, however, there is at the same time the possibility of benefiting from any future interest rate reductions.
To return to the beginning of the blog: The aforementioned benefits of real estate still apply. However, given the higher interest rates on loans, special attention should be paid to the yield calculation related to renting and also to the household budget.
If you have a concrete interest in buying a property and are thinking about signing a purchase offer, we would be very happy to advise you on the best possible financing for you.
Sources:
https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp221027~df1d778b84.en.html
https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220908~c1b6839378.en.html
https://www.oenb.at/isaweb/chart.do
https://www.euribor-rates.eu/de/aktuelle-euribor-werte/2/euribor-zinssatz-3-monate/
https://www.raiffeisen.at/de/privatkunden/anlegen/immobilien.html
https://www.derstandard.at/story/2000140340742/mit-erneuter-zinserhoehungezb-nimmt-rezession-in-kauf
https://www.tt.com/artikel/30821333/preisexplosionen-in-tirol-gibt-es-keine-immobilien-blase