Are mortgage interest rates likely to go down in 2024?

Have you been considering buying a property in Germany but been put off by the high mortgage interest rates? Peter Kleinwächter from Your German Mortgage looks at key market trends to consider whether interest rates are likely to go down next year, making buying a house more affordable. 

Many young families are under considerable pressure when it comes to housing. Rents are rising because many prospective property buyers are no longer able or willing to afford the higher interest rates, putting extra pressure on rental markets. 

At the same time, property prices have fallen; even in metropolitan areas such as Berlin, where prices were considered stable until recently, prices have fallen by up to 10 percent over the last year. 

Are mortgage interest rates going to continue falling?

However, lending rates have also fallen quite significantly in recent weeks. Will this trend continue and is it therefore advisable to continue to hope for falling interest rates? Could the prospect of a property purchase soon be on more people’s horizons?

Of course, no one has a magic crystal ball. It’s impossible to predict this development precisely, but there are a few key parameters that we can consider to make our decision-making easier. And two of these parameters indicate that there will be no major easing on the market for lending rates for the time being. Let’s dig a little deeper into those parameters.

1. Refinancing costs on the market remain high

This seems complicated at first, but bear with me – it will make sense. In a nutshell, banks refinance themselves (that is – raise capital for business needs) via several means, including the money market, the capital market, and Pfandbriefe. A lot of this refinancing is done via debt financing, typically through issuing bonds.

Bonds are units of corporate debt. They essentially act as an IOU between a borrower and a lender, and include details of the loan and how it is to be repaid, along with interest. Pfandbriefe are covered bonds. These are bonds which are secured by first-ranking land charges on residential real estate, and therefore can be considered very secure.

This background information is relevant to our discussion of mortgage interest rates because the European Central Bank (ECB) recently reversed its policy of quantitative easing (QE) into quantitative tightening. The central bank is reducing its balance sheet. 

This means that the ECB has essentially not bought any bonds since 2022 and, since the spring, has started shedding its bond holdings. During the quantitative easing years, bond holdings had grown to a total value of 5 trillion euros. Since spring 2023, this has been reduced by 15 billion euros each month. 

However, just because the ECB is shedding its bonds, it does not mean that the debt that they represent has simply disappeared. Countries and companies that have been able to use the ECB as a “drop point” for their debts since 2011 will now have to refinance large parts of their debt balances on the open market. 

Unlike the ECB, however, which provided stable rates, the market will want to see a significant return on those debts. The current interest rate paid on bank bonds, for example, is more than 4,5 percent.

The refinancing of debts previously held by the ECB is just beginning and will take a number of years. Where the refinancing costs via the general capital market are so high and structural pressure will not decrease in the coming years, there is little room for falling lending rates.

2. Key banking figures aren’t considering it

Another factor is the banks themselves and the deposits and saving accounts they hold for customers. In order to keep their existing customers on board – and indeed entice new customers to save with them – banks will need to offer good returns for savings contracts and fixed-term deposits. So they are unlikely to drop their own interest rates while rates on the market remain so high. 

Of particular interest here is the warning – it was indeed a warning – made by Belgian Central Bank chief Pierre Wunsch on November 20, 2023, to market participants. He said that the ECB will be forced to raise interest rates once again if the bet on falling conditions continues. 

Christine Lagarde, the president of the European Central Bank, followed suit on November 27, and pointed out that central bank policy will remain sufficiently restrictive in the long term. In layman’s parlance, this means: we may not raise rates, but we certainly won’t lower them.

In a nutshell: Falling interest rates are unlikely

To cut a long story short: the above are simply two important reasons why the hope of rapidly falling interest rates appears to be an illusion.

You can make a rough estimate here (and this is absolutely a rough, back-of-the-envelope calculation): if buyers do not want to be much worse off in terms of liquidity when buying and financing their property today than in 2019, then property prices would have to fall by around 25 percent from the peak that began in 2022. 

Prospective buyers should therefore focus on property prices rather than hoping for falling interest rates. If you have found a house or flat at an attractive price, go for it – before someone else does. If the price is too high, see if the seller is willing to negotiate. 

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