Growth in Construction Loans Projected to Increase by 25% in 2024

The demand for real estate financing is on the rise as consumers increasingly turn to construction loans, spurred by a reduction in interest rates. A recent analysis by Barkow Consulting, based on data from the Bundesbank, indicates that the new business volume for German banks in residential construction loans is expected to reach EUR198 billion in 2024, reflecting a significant increase of 23% compared to the previous year.

December alone saw transactions amounting to EUR17 billion, marking a remarkable 40% rise from the same month in the prior year. This uptick in construction loans can largely be attributed to recent decreases in construction interest rates, which have made financing options more affordable for consumers.

Peter Barkow, Managing Director of Barkow Consulting, noted that the current uptrend appears stable and is likely to continue. However, data suggests that the rapid acceleration seen in the third quarter may not persist.

According to FMH Financial Consulting, the average interest rate for ten-year construction loans currently stands at approximately 3.5%, a slight decline from six months ago when it was around 3.6%. Interestingly, three months prior, borrowers benefited from an average rate of just over 3.3%.

Looking ahead, the impact of rising interest rates at the beginning of the year remains uncertain. Barkow cautioned that uncertainties stemming from the U.S. concerning both interest rates and economic growth could hinder the ongoing recovery in the construction financing sector. Additionally, there is apprehension in the capital markets regarding the extent to which central banks may reduce interest rates this year, as initially anticipated.

After a period of robust growth fueled by low interest rates, the market for private construction financing faced a significant downturn starting in the spring of 2022 when interest rates surged. The rising costs associated with construction also led many prospective buyers to abandon their plans for home purchases or building projects.

In 2023, the volume of new business in construction financing plummeted to EUR161 billion, a staggering 37% decline from 2022, according to Barkow Consulting's data. As interest rates shift and market conditions fluctuate, the future trajectory of the construction financing market remains to be seen.