Real estate: why you have to go into debt


In recent weeks, financial markets have lived the pace of announcements by central banks: BCE and Fed in the lead. Declining growth expectations have prompted central bankers to make a new coup de plan on key rates already low. Deposit rates are not spared either. This "accommodative" policy aims to stimulate growth and inflation. But the fall in interest rates, sometimes to the point of negative interest rates, has above all a direct and considerable effect on the real estate market. Discover why the situation is favorable to borrowers who want to realize a real estate project.

Historically low rates thanks to increasingly generous central banks

In the face of the threat of recession and in response to a much weaker than expected economy, central banks have again in September lowered their key rates (which condition the interbank rate, namely the rate at which banks lend to each other) and their deposit rates (ie interest earned by banks on cash held in the central bank), including the ECB. The steady decline in key rates for several months, leads to a record in terms of global stock of negative rate debt. In France, 10-year OATs have been in negative territory since June 2019 and 15-year government bonds since September 2019. 14 countries of the Economic and Monetary Union currently benefit from negative interest rates on their debt obligations. State, for longer and longer deadlines. As for deposit rates, they are now in negative territory, at -0.50%.

As a result, banks can only lend money to each other at ridiculous rates, and negative deposit rates mean that it costs the bank to put money in the central bank. Instead of being paid, she has to pay for this service. Thus, rather than maintaining liquidity at negative rates, banks prefer to lend to individuals, even at very low rates.

The real estate market is full of the current situation. In fact, the 10-year OAT, which has posted a negative interest rate for a few months now, is the benchmark for mortgage rates for individuals. In addition, banks prefer to allocate their liquidity to real estate credit, especially in France, where the default rate on home loans, 0.1%, is the lowest in Europe. This means that in only 0.1% of cases, borrowers can not repay their monthly payments. In this case, the bank, to pay off, sells the property to recover the amounts due. Real estate loans seem to be an interesting alternative for banks.

Mortgage rates below inflation: real bargains for the individual

The direct consequence of accommodative central bank policy is lower interest rates for home loans. Many have fallen below the symbolic 1% mark. The biggest declines concern 20-year loans, now at 1.27% on average. As for the best files, their rates are close to 0.56% over 15 years, 0.68% over 20 years, 0.85% over 25 years.

Mortgage lending rates are therefore often lower than inflation, which is expected to be in 2019 at 1.20%. It is therefore particularly interesting for an individual to use mortgage. The individual borrows to get rich because the cost of the rate is lower than inflation.

Louis Yang (Cafe de la Bourse)

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