The past few years have been shaped by two developments in the real estate market and in the financial sector. On the one hand, property prices have risen significantly.
This can be seen in numerous cities in the country, especially in the metropolises.
For example, if you want to buy a house in Wiesbaden, you pay an average of over 50 percent more than 10 years ago. On the other hand, building rates have dropped significantly.
Both factors stand in relation to one another in that consumers wonder whether the desire for their own four walls can still be realized.
In the article, we would like to investigate the question of which is more important: relatively high property prices or low building interest?
Demand for construction finance in the private sector declines
Last year (2019) there was a small change in trend in the area of home finance. To date, demand from the private sector has continued to increase in recent years.
Last year, for the first time in a long time, it was the case that fewer private customers asked for real estate financing.
Experts such as the renowned real estate agent from Wiesbaden, Paul and Partner, explain this primarily because there are now somewhat higher hurdles for the approval of construction financing.
This primarily means the equity ratio, which is being demanded by an increasing number of banks as a mandatory prerequisite for the granting of real estate loans.
But the increased real estate prices also naturally contribute to the fact that a little more single people and families in Germany believe that they can no longer afford a home. We would like to discuss whether this is actually the case in the following sections.
Real estate prices rose by over 70%
The price increases in the property market have actually been drastic in some cases in the past five to ten years.
In large metropolitan areas, in particular, we have noticed that the prices for single-family and multi-family houses as well as for condominiums have in some cases increased over 70 percent in recent years.
For example, if you want to buy a condominium in Wiesbaden, you pay more than 40 percent “price premium” compared to 2014.
Other examples of a significant price increase of more than 50 percent on average are the following metropolises:
In addition, however, the tendency is also in more and more medium-sized cities, with the university cities, in particular, to be mentioned, to significant price increases. Cities such as Freiburg, Heidelberg, or Marburg are affected.
The tide has also changed in the outskirts of major cities, some of which were relatively cheap in terms of homeownership ten years ago.
From this point of view, it is understandable that fewer people than a few years ago can afford a home and the associated construction finance. But what about the interest rate side?
Building rates become historically low in 2020
While the rising property prices tend to argue against the fact that average earners can still afford a home, the building rates speak for it.
Current real estate interest rates are historically low and are now ideally already approaching the 0.5 percent mark or have already fallen below it in some cases.
This means that in the best-case scenario, with a fixed interest rate of five years, you only have to pay 0.5 percent interest on a real estate loan.
With the other fixed terms, the interest rate is not significantly higher, so that average building rates of one percent are not uncommon.
Insufficient equity as an increasingly common problem
One problem with realizing home finance is not necessarily the increased real estate prices and certainly not the building interest.
Rather, it is the minimum equity ratio that banks are demanding more and more, which often affects younger families in particular.
Paul & Partner also sees this as an experienced broker from Wiesbaden, who advises his customers on buying a home. Some banks now only grant real estate loans on the condition that the customer can bring at least 20 or 25 percent equity into the financing.
This means that, for example, with a purchase price of 200,000 euros, you would have to have at least 40,000 euros in reserves that can flow into the financing as equity.
Not all lenders are so strict, but some banks are even ready for full financing. In that case, mortgage lending will be considerably more expensive than if you can tie insufficient equity.
The bank’s capital requirements are definitely becoming an obstacle that single people or families with average incomes cannot overcome.
How much does construction finance currently cost on average?
At this point, we would like to come back to the initial question of whether average earners can currently still afford home finance or their own four walls.
One way of calculating this would be to look at the development of property prices in recent years on the one hand and the rate of construction interest on the other. Ultimately, however, it only depends on the current prices and conditions, whether you can still afford your own four walls.
Therefore, we would like to use an example to calculate what your own property would currently cost, for example, if you are thinking of buying a house in Wiesbaden. The right construction finance could be equipped with the following conditions:
Purchase price single-family house: € 250,000
Ancillary purchase costs: € 30,000
Equity: € 40,000
Loan amount: € 240,000
Building rate: 1.10%
Fixed interest rate: 15 years
Initial repayment: 4%
Monthly loan rate: 1,020 euros
The yardstick for whether you can afford this building finance and thus also the desired property is certainly the monthly charge in the form of the loan rate. A good indication of whether this rate is portable or not is your previous rent. If the loan rate is lower than the current rent, there is a good chance that you can afford the property. If the loan rate turns out to be higher, you have to calculate once again on the basis of your income and expenditure on how high your freely disposable income actually is.
To determine this, the so-called income and expenditure calculation is particularly suitable. Professional brokers such as Paul and Partner as brokers from Wiesbaden also recommend this. You compare your income, usually your salary, with monthly expenses. The expenses are mostly numerous items, in particular:
Living expenses (clothing, food, hygiene articles)
Car costs (petrol, vehicle tax, insurance, repairs)
Of course, you do not have to take the rent into account here, because it will no longer apply if you live in your own four walls. As a result, you receive the so-called freely disposable income. This must be at least as high as the loan rate that you calculated for real estate financing. At best, there is still some buffer between the credit rate and disposable income. If it gets too tight, you can of course – in the example – reduce the initial repayment somewhat. This reduces the monthly charge, which could make the loan rate acceptable.
Home cannot be financed: what can I do?
If you use the calculation to determine that your income is insufficient to finance your own home, there are several things you can do. The most obvious thing to do is to lower the requirements a bit and decide on a cheaper property. However, this is often not desired. Another alternative is to opt for a lower repayment. Because of the low-interest rate situation, experts are currently recommending a redemption share of at least three percent.
However, an initial repayment of two percent may still be acceptable. Another measure can be that you provide more equity. This not only safeguards the financing better, but the banks are also willing to offer cheaper building rates. Whether and in which case the increase in equity can be realized depends, of course, on the individual situation.