One of the key reasonscited in Germany for the non-existence of a residential housing price bubble is the moderation with which German banks have been extending finance for property investment. The Deutsche Bundesbank’s oft-cited fears that property may be up to 25% overvalued in certain quarters in the larger German cities are frequently allayed by critics who point to the low interest rate environment, long-term lock-ins of loans at these fixed low rates, and the higher level of equity that many German buyers have been stumping up to realise the dream of owning their own roof and four walls.
Here at REFIRE we’ve been following the German domestic housing market as part of our brief for the last ten years. We witnessed the demise of the 100%-plus financiers such as ING, GMAC-RFC, and a Deutsche Bank subsidiary muscling in on what looked like an emerging lucrative sector back in 2006 when the privatisation mania in Germany was beginning to take hold – just prior to the global financial crash.
Since then we’ve largely been hearing the moral tale of sound German financing practices, the need for high levels of personal equity to maintain investor probity, and how there is little danger of overheating because of the stable levels of bank lending into the sector.
We’re now certainly witnessing a much bigger push into the provision of home loans by Germany’s banks as the downside of low interest rates means fixed-income investments are much less attractive. According to Barkow Consulting, the margin on mortgages averages 1.2% compared to less than 1% on government bonds, hence the banks are shifting resources to grab a bigger share of the one segment that’s doing well, although overall the mortgage lending market surprisingly seems to be actually shrinking.
According to the Bundesbank, sector lending to homebuyers was €168bn for the first ten months of 2014, down 0.4% in value terms from a year ago, but up 2% in number of mortgages from a year earlier. So what’s really happening is what Germans like to call a Verdrängungswettbewerb, where ever more competitors compete for a larger share of a fixed pie. With 2015 shaping up to be just as competitive as 2015, several big lenders are taking steps to gain an edge on their competition.
The housewife’s favourite, Deutsche Postbank, which is part of Germany’s largest bank Deutsche Bank, is doubling its number of home loan advisers to 600 and creating a borrower-friendly website where customers can apply for a home loan. It plans to reduce rates to attract new customers, offering a 10-year mortgage with a rate of 1.5% fixed for 10 years, on a 60% loan-to-value ratio.
Rival Commerzbank, with more than 12% market share, is also making a big thrust into more home lending by aggressively targeting its existing customers with loyalty discounts and other preferred customer benefits, including the option of getting approval for government subsidies for energy-saving improvement while still in the loan application process. Commerzbank is offering 1.3% fixed for a 10-year, €100,000 loan.
Other banks, including ING-DiBa, are actively looking at reducing rates in cities where competition from other banks is highest, and where prices have risen the most, such as in the biggest seven cities. And still, if the figures from the European Central Bank are to be believed, the share that Germans who take out mortgages spend from their household income on loan repayments is no more than 12.8%, compared to 17.4% in France and 20.5% in Spain. The evidence is that Germans really are taking less risk, stumping up more equity and paying off principal faster than in the past, at interest rates fixed for longer periods.
It is little wonder then, if this reflects the emerging model in Europe’s biggest housing market, that a fundamental seachange may be underway that will see Germany emerge from a nation of renters to one where owner occupiership starts approaching levels seen in neighbouring European countries. It may take a while, but it’s moving in that direction.
As we head into the Christmas period, Germany’s DIFI Index on financing sentiment, managed jointly by property adviser JLL and the ZEW (Centre for European Economic Research) has just reached a new all-time high, despite what the latest report describes as “remarkable in view of current tensions in the overall economic situation... and where almost all German economic indicators for the current year have been adjusted downwards.” Financing conditions for all sectors – office, retail and logistics – have improved strongly over the past six months, boosted by expansive monetary policies and Germany’s good showing in the recent bank stress tests.
For these researchers, the prognosis for 2015 is clear: Germany’s biggest cities are heading for a further year of real estate price rises, particularly in the office and residential sectors. All the lights seem to have turned green. This would normally disturb us, but we too are looking forward to the break. We wish all our readers a peaceful Christmas, and look forward to a productive new year in 2015.
