Munich, 6th September 2023
Catella Finance Focus #02/2023
"Is this it for interest rate hikes?" This question has been addressed to us very frequently in recent days. The background is clear: The real estate industry has been in crisis mode - since the first interest rate hikes in June 2022. It wasn't so much the interest rate adjustment per se. More dramatic was the speed with which the ECB or the respective central banks in Europe steadily increased the key interest rate, driven by the authoritative goal of fighting the "height and persistence" of inflation. Put more simply, to bring it back down to a lower level.
On July 27, 2023, the last - temporary - interest rate step was decided by the ECB Governing Council, this time unanimously, by the way, thus also continuing the course of a restrictive monetary policy. The ECB expects inflation to fall further over the rest of the year, but to remain above target for some time to come.
Our map on page 3 of the Finance Focus shows the dilemma geographically and thus the difficulties currently facing the ECB. Inflation rates vary considerably across the euro area:
- Austria leads the way with an HICP rate of 7.8%, while the rates of Luxembourg at 1.0% or Spain at 1.6% are already below the ECB's target inflation rate.
- The largest economies in the euro area Germany, France and Italy report inflation rates between 5.7% and 6.8%.
However, this fiscal policy, which admittedly hurts the real estate industry, seems to be bearing fruit: according to the latest ECB survey of analysts, overall inflation in the euro area is expected to fall from 5.5% in 2023 to 2.7% in 2024 and 2.2% in 2025.
But the ECB is not alone in Europe in its fight against inflation:
- Norway's central bank raised its key interest rate to 3.75% on June 23, and Sweden's central bank followed suit with the same rate on July 5, 2023.
- Denmark's key rate has been 3.50% since July 28, and the Bank of England raised its key rate for the last time to 5.00% on July 14, 2023.
- Only the Swiss National Bank has not raised rates as drastically, as the Swiss inflation rate is still one of the lowest in Europe. Currently, the Swiss prime rate has been 1.75% since June 23, 2023.
- In the fight against persistently high inflation, the BOE Bank of England raised the key interest rate again by 0.25 percentage points to 5.25 percent at the beginning of August. This is already the fourteenth-rate hike since the end of 2021.
Therefore, back to the initial question: Is that it now?
A clear NO: We assume a further rate hike of 25 basis points for all three key rates, which will be announced after the next Governing Council meeting on September 14, 2023. Our assumptions and outlook are set out in the text.
And the real estate industry?
This will continue to offer solutions at the level of very low transactions, falling market values, stagnant space rentals and the increasing pricing of CO2 costs into the overall balance. Nevertheless, we share the hope that the September decision will mark the peak of the rise in interest rates. By the time the real estate markets get going again significantly, it will be 2024.
Therefore, enjoy the summer privately, the fall and winter will be rough.
Ihr Prof. Dr. Thomas Beyerle