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Inflation on the retreat – What does this mean for real estate?

Encouraging news: Inflation continues to retreat, reaching a comparatively low level of 3.2% in November for the first time – the lowest since June 2021, to be precise! The world is in turmoil and has been characterized by frightening events: From the coronavirus crisis and the Russia-Ukraine war to the energy crisis…

This makes it all the more important to focus more on the positive aspects. Falling inflation is without question a cause for relief for everyone. But what does the development of inflation mean, especially for property prices? By all appearances, the European Central Bank’s course is set for easing. According to our forecast and the opinion of many other experts, it is almost impossible that interest rates will continue to rise.

Based on our assessment of the current situation, interest rates will remain stable for the next few months. In fact, everything points to the first downward adjustment of interest rates. This is likely to happen in the second to third quarter of 2024 at the latest. Even if interest rates do not approach the zero level in the foreseeable future, the ECB will probably initiate a correction of the key interest rate towards 3% in the near future.

The ECB’s possible decision to lower the key interest rate in the future will be influenced by various factors. Inflation is continuing to ease. This is a good indication that the need for a restrictive monetary policy is receding into the background. If we take a look at the economic data for the EU, there is little to be pleased about at the moment. A reduction in interest rates would raise hopes that the population’s purchasing power would increase.

It will become more interesting to invest again and the economy will therefore have a chance to recover. This would therefore not only encourage positive developments in everyday life, but would also have a significant impact on the investment sector.

Inflation and real estate

An increasingly relaxed ECB policy also has an impact on the real estate market. Keyword building interest rates or real estate loans. Falling interest rates also have an impact on real estate financing, and in a positive sense: the European Central Bank’s looser monetary policy means that financing fees for real estate will settle at a historically low level again.

What about the fundamental interest in investment properties? Due to the increasing stabilization of the inflationary situation, there is already an increased demand for existing properties. What is the reason for this? Past circumstances have led to less construction and development. Higher interest rates, increased land prices, high construction costs and political guidelines dampened progress. When it comes to the latter, the socially responsible use of land in Munich, or SoBoN for short, comes to mind.

The concept, which was tightened up in 2021, stipulates that investors are obliged to build at least 60% social or price-controlled rental apartments. However, there have now been positive changes in the area of construction and development. Apart from the fact that interest rates are increasingly recovering, the prices of building materials such as wood, steel and concrete are also falling.

Last but not least, real estate prices, which have fallen by up to 20% since the start of the interest rate turnaround, are a decisive factor. Low prices meet falling interest rates and a sharp rise in rents. Demand for investment properties will continue to increase, especially in view of interest rate cuts in the future.

In all likelihood, as soon as the key interest rate is finally lowered, the already strong demand for renovated existing properties will increase further and develop into a real hype. Property prices will also slowly but surely recover over the course of next year, according to forecasts. A noticeable rise in prices can probably be expected by the end of next year.

An investment is and remains a highly individual decision. However, there is a well-known Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second best time is now.” In terms of real estate, this means that the best time to invest is now. Especially if you want to take advantage of the current market situation and the resulting opportunities.