28. March 2023 / Home » Knowledge » What the rise of global interest rates means for the real estate and construction industry What the rise of global interest rates means for the real estate and construction industry The recent increase in interest rates from February 2023 by the European Central Bank (ECB) and the Swiss National Bank (SNB) is having an impact on many industries, particularly the real estate and construction sectors. In this blog post, we will take a closer look at the impact on these industries and the new opportunities created by the new rules of the game. Throughout the past year, the Federal Reserve System (Fed) and the Governing Council of the ECB have continuously and gradually raised interest rates. As of February 8, the top lending rate (main refinancing rate) in the euro area is 3 percent, while the deposit rate relevant for savings rates is 2.5 percent. Almost at the same time, Eurostat announced that it was forecasting a year-on-year inflation rate of 8.5 % in the euro area for January. The SNB also stepped in, putting an end to the negative interest rate policy. Why do central banks raise interest rates? First, let’s look at the reasons for the rate increases. The ECB and the SNB are raising interest rates to keep inflation in check. Higher interest rates make loans more expensive and thus dampen demand for consumption and investment. This in turn should stabilize prices and prevent the economy from overheating. How the real estate industry is feeling the effects of interest rate lifts One of the obvious effects of interest rate increases on the real estate industry is a possible decrease in demand for real estate purchases and investments. As interest rate increases raise the cost of loans, many people and businesses are forced to avoid buying real estate or postpone their plans. This could lead to the real estate market stagnating or even declining. Another impact of interest rate hikes on the real estate industry is the change in property prices. Households and businesses in this situation must pay higher interest rates or make higher equity contributions to acquire real estate. As a result, many real estate buyers are withdrawing from the market or switching to cheaper options, which puts even more pressure on prices. The construction industry is also affected In the construction industry, higher interest rates are causing a decline in investment in new construction projects. In the times of negative interest rates in Switzerland, it did not make sense to have the capital lying in the bank. Real estate investors were eager to spend and invest, construction project failures were tolerated, and quantity often took precedence over quality. The economic situation will now set the opposite trend. As higher interest rates increase the cost of loans, many project developers may have difficulty obtaining the necessary financing to begin new projects. This could lead to construction activity stagnating or even declining. In addition, higher interest rates also drive up the cost of raw materials and construction materials, which increases the overall cost of construction projects. Over time, this means difficulties for many construction companies to offer competitive prices and the risk of long-term reduction of profit margins. How can the real estate and construction industries benefit from VR technology while prime interest rates and construction costs in general are rising? It is not all negative, however, in terms of the impact of interest rate hikes on the real estate and construction industries. The new economic situation is forcing companies to rethink their business processes and look for innovative solutions to save costs and time, as well as offer unique buying experiences to their customers. This could lead to greater competitiveness in the long term. One such solution is HEGIAS VR. It allows: Usage simulation: Future users of a property (e.g., in a hospital, doctors and nursing staff) walk through the future property during or even before the planning stages. BIM collaboration: Errors – so-called issues – are discussed directly in the virtual twin of the planned project. Walkable visualisation of 3D models: 33D models are the starting point for VR. With VR, these models then become 1:1 – immersive – walkable, and independent of time and location. This can help architects and builders visualize designs of their projects and make changes before construction begins. This saves time and money and at the same time improves the quality of the work. Client retention: The use of VR technology also helps build customer loyalty by providing an immersive and innovative customer experience. The technology can also help improve the company’s image and boost customer confidence. Virtual showroom: Real estate agents can offer virtual tours that allow potential buyers to view properties from anywhere and also configure them when they make a purchase. This can save time and money, especially when it comes to buying properties in other cities or countries. If you are unfamiliar with our software and / or virtual reality, contact us for a demo with no strings attached. We will be happy to advise you and answer your open questions. Register for a live demo Glossary Prime rate An interest rate at which central banks lend money to commercial banks. The prime rate is an instrument of monetary policy and is used by the central bank to steer the economy and ensure price stability. A low prime interest rate generally leads to lower interest rates for loans, thereby boosting the economy as companies and consumers can invest and consume more easily. A high prime rate, on the other hand, tends to have a dampening effect on the economy, as loans become more expensive and demand falls. The prime rate is set at regular intervals by the central banks and can be adjusted depending on the economic situation and inflation. Loan rate (main refinancing rate) An interest rate charged by a central bank to its commercial banks to regulate their borrowing. The main refinancing rates are an important component of a central bank’s monetary policy. When the central bank raises interest rates, it becomes more expensive for commercial banks to borrow money, resulting in less lending and slowing the economy. When the central bank lowers interest rates, it becomes cheaper for commercial banks to borrow money, which can lead them to lend more and boost the economy. For consumers, loan rates can be important because they can affect the interest rates banks charge their customers for loans and mortgages. When the main refinancing rate rises, interest rates on consumer loans may also rise, increasing the cost of borrowing. Negative interest rates Aninterest rate that is below zero. In other words, it is an interest rate at which you no longer receive interest for lending or investing money, but instead have to pay interest. Negative interest rates are usually a consequence of a central bank’s monetary policy in an attempt to boost inflation or stimulate the economy. When a central bank lowers the prime rate, for example, to encourage lending and investment, interest rates for banks and other financial institutions can become negative. For bank customers and investors, this may mean that they have to pay interest for holding deposits with a bank instead of receiving interest on them. Negative interest rates can also apply to bonds, which means that investors make a loss when they buy a bond because the interest rate is below zero. Economic cycle Theeconomic development of a country or region. It indicates whether the economy is in recovery, recession or stagnation. The economy is measured using indicators such as gross domestic product (GDP), the unemployment rate and the price level. An upswing is also referred to as a boom and is reflected in a growing economy, rising prices and falling unemployment. A recession, on the other hand, is characterized by a decline in economic output, rising unemployment and falling prices. In the event of stagnation, economic output remains at a stable level. The economy is influenced by various factors, including the monetary policy of the central bank, the willingness of companies to invest and consumer demand. The government can also take measures to influence the economy, such as investing in infrastructure or reducing taxes. Knowledge of the current economic situation is of great importance to companies and investors, as they make their decisions on the basis of expected economic developments. Inflation An economic phenomenon denoting an increase in the general price level of goods and services in an economy. When inflation increases, money loses purchasing power because it can buy fewer goods and services than before. Inflation is usually measured as a percentage and can be caused by a variety of factors, including an increase in the money supply, a slowdown in production, higher commodity costs, and an increase in demand for goods and services. Moderate inflation can be positive, as it can help boost economic growth and increase employment. However, high or uncontrolled inflation can lead to a deterioration in economic conditions, including a reduction in purchasing power and a decline in investment and economic output. To control inflation, for example, central banks can raise the prime rate to discourage lending and thus reduce demand for goods and services. Central bank A central bank is an institution mandated by a government to manage monetary and exchange rate policy. The main task of a central bank is to ensure the stability of the currency and to control price stability. The most important tasks of a central bank include controlling the money supply, setting interest rates, and supervising banks and financial markets. The central bank can also serve as a lender of last resort by lending to banks in financial difficulty. In many countries, the central bank is independent of the government in order to be able to make its decisions freely. However, the central bank has a close working relationship with the government to ensure that monetary and exchange rate policies are consistent with the country’s economic and political objectives. The world’s major central banks are the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China. Virtual reality A computer-based technology that allows users to immerse themselves in and interact with an artificial, three-dimensional environment. VR headsets placed on the user’s head create visual and often audio experiences that create a more immersive experience than traditional computer screens. VR can be used in various fields, from entertainment (e.g., VR games) to education (e.g., virtual training) and medicine (e.g., virtual therapy). Technology also has the potential to change the way we work and communicate by facilitating remote work and virtual conferencing. Although VR is still relatively new and not yet used by everyone, the technology is expected to become more common in the future, leading to new and exciting developments in various fields.