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One of the arguments frequently mustered by defendants of the prudent German financial model – as a bulwark against the encroaching culture of lower credit standards and sub-prime financing more readily associated with the Anglo-Saxon cultures – is that house buyers in Germany are required to commit much more equity before being granted mortgage financing on their property.
This, the German financial community is always quick to point out, makes the whole house-buying process in Germany a much more serious affair, and one which forces buyers to consider carefully their long-term commitment to home ownership and wealth-building. As a rule of thumb, 20% to 40% equity as a down-payment has generally been considered the basis of sound residential property investing.
REFIRE has pointed out several times recently that we were seeing plenty of evidence in our professional and personal circles of fairly easy credit being offered to potential house-buyers in Germany, which was certainly having the effect of luring those who traditionally might have been ‘renters’ into considering – or actually becoming – the proud owners of their own four walls.
We don’t see anything inherently wrong in this. Before the financial crisis, several mortgage finance providers were offering 95% or even 100% mortgages in Germany to enable tenants to buy their own apartment. Foreign providers such as GMAC RFC were actively making inroads into the full-finance market before their sources of re-financing via the capital markets dried up, and the providers withdrew from the market.
For a tenant who’s been punctually paying his rent of €650 for the past twelve years, finding a mortgage finance provider who will offer him ownership of the same dwelling for, say, €675 per month can make abundant sense. Comparing him with the NINJA candidate from American sub-prime lore, who had hundreds of thousands offered to him with nothing down and little or no documentation, is simply unjust. The two situations are worlds apart, in terms of the recipients’ willingness – and ability – to pay.
Leading German property portal Immobilienscout24 has just published a new study which claims that the recent surge in German property prices in the larger cities is exposing buyers and banks to greater risk than has traditionally been the case. The portal’s study examined 23,500 credit applications made on its own website, the leading website in the industry.
According to Immobilienscout24’s head of property finance Ralf Weitz, “The level of equity capital paid in by potential buyers has nearly halved over the last two years”. Most buyers in cities such as Berlin and Munich, where prices have risen rapidly, now no longer stump up much more than 11% in equity, the study shows.
In Munich, the level of equity fell from 25% to 14% since the beginning of 2011, in Hamburg from 22% to 10%, in Cologne from 17% to 9%, and in Frankfurt from 19% to only 8%.
The study shows there are also a lot more buyers out there, driven to consider buying through rising rents and classically low interest rates – leading to a German boom, paradoxically caused by the financial crisis elsewhere which had its own roots in loosened lending criteria, but which has led to a flood of money into the ‘safe haven’ of Germany.
According to Niels Nauhauser of the Baden-Württemberg Consumers Association, “Mortgage loans with low levels of equity can turn out to be explosive if the price of property falls over the coming years.” When the (mostly fixed-rate) loans are due for renewal in five or ten years, banks will be looking for further equity injections to cover their risk. “Buyers who aren’t able to come up with the extra money will then be faced with having their homes foreclosed upon”, he warns.
Many banks justify the decision to accept lower levels of equity by the extra margins they charge for the loans, while paying lip-service to the 20% desirability hurdle. In reality, most banks will look seriously at any borrower able to stump up 10%, and adjust the interest rate accordingly. ING DiBa, a veteran of the 100% financing school, concedes that its rate for a 10-year 100% mortgage is 3.6%, rather than the 2.5% for a buyer with 40% equity. A lot extra to pay over the medium term for those with little or no down-payment.
Still, a number of commentators in Germany see the drastically lower level of equity being proferred as a sign that the rate of price increases in the big cities is coming to an end, on the grounds that they simply don’t have the money to drive the prices even higher. The accelerated rate of new house-building in cities is also dampening further bubble tendencies, they believe.