Bundesbank cautions on upswing, Moody's warns on bank threat

The upswing of prices in the German residential property market is gaining momentum, Deutsche Bundesbank cautions in its current monthly report. The report is compiled using the bank's own resources, combined with external data from researchers BulwienGesa, Pfandbrief association VDP, fintech provider Hypoport and Destatis, the federal statistics office.

According to the report, residential property in 127 cities cost an average of 6% more in 2015, after the rise had weakened significantly from 7.5% to 5.5 % in 2014, bringing the price dynamics to the average level of the past 5 years. In the attractive large cities, the growth rate was notably lower than the five-year average at 6.25 %.

New leases for existing units climbed 3.25 % across all cities, a similar increase to last year, while rent dynamics for new units again weakened considerably. Rent adjustments in large cities were decidedly lower than in the previous year, which the Bundesbank states could be related to the introduction of new rent control regulation.

Credit rating agency Moody's wasted little time in issuing its own warning that the rising market could pose a threat to the country's banks in the event of a subsequent price correction. It cited the earlier data released by the Bundesbank pointing to prices outpacing both economic and demographic fundamentals, especially in the seven biggest cities, where prices have risen by 40% since 2010.

Ultra-low interest rates and the arrival of more than 1 million refugees to Germany last year are helping to put further demand pressure on property, especially in cities. The Bundesbank estimates that the flood of refugees itself will be responsible for between 0.5% and 1.0% in rental and investment price increases over the next 2 years.

Moody's said residential property inflation was a credit negative for banks with high exposure to residential property lending because of the risk of a retrenchment.

Rising property prices have diminished the loan-to-value (LTV) ratio of loans made several years ago, but this positive effect has been outweighed by banks' aggressive expansion of new lending at higher property prices in 2015. "New business volumes increased to €244 billion in 2015 from €200 billion the previous year," said Moody's Associate Managing Director Alexander Hendricks.

Loans where the LTV ratio was above 100% had risen to 16 per cent of total housing loans in 2015 from 15% a year earlier, Moody's said. But this could rise to more than 40% if property prices were to retreat to 2010 levels, it said.

Should a customer default, banks typically face higher loss charges for high loan-to-value exposure than for low LTV exposures.

"If there were a price correction, which we are not forecasting here, a materially increased amount of mortgages would fall back into the category of loan-to-value of 100% or more," Mr Hendricks said.

Professor Lars Feld, of the government's Economic Advisory Council, addressed the residential market in his recent presentation to delegates at the Quo Vadis annual conference, held recently in Berlin and attended by REFIRE. He cautioned against wrongly targeted tax incentives which could lead to market distortions and irresponsible speculation in the market, while warning that ölthough mortgages are underpinned with a high proportion of equity, an economic downturn could lead to price corrections.

However, his overall tone was optimistic. “Higher wages and salaries, combined with investors restructuring their investment portfolios to include more real estate, continue to have a positive impact on the real estate economy. A bubble of the kind which would pose a threat to the overall economy could only develop if a disproportionate number of apartments were built.” Since this is not the case, he said, there is little danger of systemic risk.