How do you calculate the affordability of rent

Flashcards

The real interest rate is the nominal interest rate of a financial investment adjusted for inflation (nominal interest rate minus inflation rate). It takes into account the loss of purchasing power and financial assets when prices rise and influences the savings and investment behavior of consumers and companies in the economic cycle.

Negative real interest rates arise when the nominal interest rate on the deposit (e.g. overnight money) is below the inflation rate.

The real interest rate can be used to calculate how high the interest rates are in reality, ie "real". Because only the nominal interest rate alone does not make any statement about how the interest rates are at a certain time. The inflation rate factor has to be added to this in order to obtain a correct result about the real interest rate level that is available at the time.

  • Further with examples:

The nominal interest rate depends on the key interest rate of the ECB.

1. 2017 key rate: 0% / Loan rate mortgage: 1% / Inflation: 1.6% / overnight money: 0.5%; real: -1,1%
-> Cheap loans, the nominal interest rate on the deposit is very low and the real interest rate is even negative.

2. 2008 key rate: 4% / Loan rate mortgage: 5% / Inflation: 1.1% / overnight money: 3%; real: +1,9%
-> Expensive loans, the nominal interest rate on the deposit is very high compared to today and the real interest rate is positive.

If you get a nominal interest rate of 1% for a savings balance from your bank and the inflation rate is 1.6%, the real interest rate is -0.6% (1-1.6). For example, Cyprus currently has inflation of -0.4% (i.e. deflation of 0.4%), while Germany currently has inflation of 1.6%. According to this, Germany has a real interest rate of -0.6% and Cyprus a real interest rate of + 1.4%. With otherwise the same interest rates, the real interest rate in Cyprus is currently significantly higher (+ 2% compared to Germany). It thus becomes clear that the real interest rate rises with increasing deflation expectations (inflation -0.4% / interest rate 1% = + 1.4% real interest rate).