Rate of growth halves in German bank property lending

Growth in German property lending by its banks and savings banks halved in the fourth quarter, growing by a mere 0.8% compared to 1.5% in Q3 and 1.7% in Q4 of 2021, new data from Barkow Consulting show.

The figures for January might even show a reduction in the overall level of outstanding property finance for the first time in seven years, said Peter Barkow, CEO of the consultancy. "For one, the market is generally performing weakly, while January is traditionally the weakest month for property lending," he said.

Figures from Commerzbank confirm the fall in new business in the fourth quarter. Finance director Bettina Orlopp, presenting the bank's annual figures in Frankfurt, commented: "If there is no trend reversal here, then our loan book will actually start to shrink this year."

Not good news for the bank, which would stand to earn more on the higher margins now available on mortgage lending. And mortgage lending represents the largest share of all banks' lending, at 43.1%, ahead of corporate lending at 36.7%, the Barkow figures show.

Hardest hit have been the Sparkassen, or savings banks, which saw growth of only 0.6% in the final quarter, to €2.2bn. This was less even than the co-operative banks Volksbanken and Raiffeissenbanken, whose lending volume rose by 0.9% to nearly €3bn. All three banking groups have traditionally had a very close relationship with their customers, who tend to have strong local ties and community involvement. The fall in bank lending at the Sparkassen in particular suggests a new restrictive lending policy and much closer scrutiny of loan applications.

This is confirmed by the Bundesbank's latest "Bank Lending Survey" which interrogates more than 30 banks every quarter on their lending practices. The data show a sharp jump in the number of outright loan rejections, with rejections to individuals outweighing refusals for credit applications from companies.

The Bundesbank's lending guidelines to banks in Germany has been stricter than in other European countries, on the basis of the bigger run-up in German property prices over the past ten years. Since February last year and admonitions from the EU Risk Advisory Council (ESRB), Germany's financial watchdog BaFin has been tightening its supervision of banks' property lending. Since then, the surge in interest rates over the last twelve months, and particularly the last six, has been accompanied by the banks' raising their margins, thus earning more per loan on an albeit severely shrunken lending volume.

The Bundesbank's monthly report for February carries specific warnings for what it calls 'Exaggerations' and 'Overvaluations', rather than any reference to bubbles. These excesses represent a gap of betweeen 25% and 40% of what house prices 'should' be, based on fundamentals, it says. The minimal price falls visible since the last quarter have had little or no effect so far on these 'overvaluations', it said.

The Bundesbank has been warning about severe price distortions in the housing market for years now, without it having any effect on prices, which just kept going up. In its latest report it emphasises the relationship of house prices to annual rent, which in recent years have been on average 30% above the long-term trend. In the Big 7 cities, they've been up to 40% higher than the long-term average. By other measures, such as the ratio of house prices to income, prices are 20% to 30% above long-term values, the report says.

Statistics from researchers Bulwiengesa and the Association of German Pfandbrief-issuing Banks (VdP), which the Bundesbank relies on for housing data, show that house prices in Germany rose last year by 6% or 9% (depending on data used, small and mid-sized cities, etc.) The Europace index from Hypoport, which we track closely here at REFIRE, points to 7.7%, based on actual prices achieved. But all see a downturn in the last two quarters of last year. leading the Bundesbank to conclude that the multi-year boom in house prices is definitively over.

Despite these recent moderate price falls, there is little cause for optimism, says the Bundesbank, while studiously avoiding any reference to a bubble bursting, in contrast to its many earlier pronouncements. "The bottom line is that housing affordability has deteriorated significantly and is now below its level before the outbreak of the financial and economic crisis in 2008/09," it says.

The situation is not helped by the loss of momentum in the expansion of housing supply. Not only has labour been in short supply, but the cost of building materials has risen significantly, pushing up the cost of construction projects, and leading to a huge increase in project cancellations.