Interest rate commentary may 2019: low, lower, construction interest rates

The german economy grew by 0.4 percent compared to the previous year's quarter, and the already low construction interest rates continue to fall. In the current interest rate commentary, we show what this means for consumers.

Construction industry and consumer spending drive upswing

The past few months have been marked by countless negative economic reports. This made the announcement by the german federal statistical office on 15 september all the more surprising. May: the german economy grew by 0.4 percent compared to the previous year's quarter. The construction industry and high-consumption consumers are primarily responsible for growth. Those who are now speculating on a return of economic growth are likely to be disappointed, however: the positive development is probably just an outlier.

Construction industry: full order books thanks to low construction interest rates

The fact that the construction and real estate industry is booming is not surprising given the favorable financing conditions. 2018 was a good year for the construction industry: it grew at the fastest rate in a quarter of a century. Record-breaking growth is likely to continue this year: current construction rates are reaching new lows from week to week. The best interest rate for 10-year mortgage loans has been hovering below the 1 percent mark since february this year.

For home builders, this is both good and bad news: on the one hand, they can take out a loan on extremely good terms and pay very little interest to the bank. On the other hand, the high demand for new construction and existing properties is leading to higher purchase and construction prices. And if you've been looking for a handyman lately, you know that he's usually a long time coming. Full order books and a lack of skilled workers are making it increasingly difficult for the skilled trades to meet current demand.

However: the construction boom and the positive first quarter should not hide the fact that 2019 is likely to be a rather weak year overall for the export-dependent german economy. The renewed escalation of the trade conflict between the USA and china and possible US punitive tariffs on european vehicles are having a particularly negative impact in this country. In addition, the automotive industry, which is important for germany, is facing numerous challenges and currently has to shape a fundamental change to other drive technologies and new mobility concepts.

The ECB, low interest rates and the missing effect

For years, the ECB has opened its money floodgates yawningly wide: bond purchases worth billions, the prime rate at zero percent, the deposit rate even negative. Europe's monetary policy has never been so expansionary, but despite all the measures taken, the inflation rate is not moving significantly towards the 2 percent target set by the monetary authorities. The fact that the economy has been weakening again since the end of 2018 after a brief period of recovery puts the ECB in a particularly difficult position: raising the key interest rate will not be possible in the foreseeable future. In the worst case scenario, additional measures will be needed to revive the weak economy.

At the same time, persistently low interest rates are increasingly becoming a problem for banks and private individuals. As decided at the last meeting, the ECB is therefore currently examining which measures it can take to relieve the burden on distressed banks, for example by granting allowances for penalty interest rates. However, such measures are of little use to individual consumers: savings will not be possible in the euro zone for quite a long time to come. The only bright spot for consumers is the enormously favorable lending and construction interest rates.

Does the european election have an impact on construction loan interest rates??

Until sunday, 26. May, elections are held in the 28 member states of the european union. The british must also go to the ballot box. Until recently, prime minister theresa may had tried unsuccessfully to prevent the election from going ahead. Now the british had to organize not only the election itself but also the election campaign in a hurry. The likely consequence of the brexit chaos: the british punish both the ruling tories and the opposition labor party and give their vote to the newly formed brexit party. If this is indeed the case, many bitter EU opponents will move into the EU parliament, at least temporarily. Until the EU leaves, they could block important decisions, for example on the budget or the election of the new EU commission, and thus paralyze the EU.

At the same time, surveys in other member states also point to a strengthening of right-wing and euro-critical parties. However, the financial markets have already priced in a certain influx of far-right parties. Provided that the populists do not make unexpectedly large gains, the impact on the financial markets and thus also on the currently already low interest rates for construction loans is therefore manageable .

Low construction loan rates reach all-time low

At the beginning of may, the yield on the 10-year federal bond seemed to recover and even reached slightly positive territory for a few days. On 14. May, however, it fell again to a low of -0.06 percent. The current interest rate for the best interest rate on 10-year mortgage loans is based on the yield of the federal bond and is therefore also falling: at currently 0.68 percent, construction interest rates have now returned to their all-time low of october 2016. That means: interest rates for a property loan have never been lower than they are now. And: this low has already lasted for months. Since february, the best interest rate has been consistently below the 1 percent mark. Anyone interested in buying a property in view of the low interest rates on building loans should not be blinded by the good conditions, however: whether the purchase of a house or an apartment is worthwhile depends above all on the property price.

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