Pfandbrief banks see lending fall, demand looser regulation

Germany's main property lenders are all seeing a decline in their new business underwriting despite some evidence of mildly falling residential property prices, confirmed the Association of German Pfandbrief Banks (VdP) at their annual press conference in Frankfurt last week. 

The VdP is calling on the financial regulator BaFin to review its recently-introduced stricter capital requirements on domestic bank lending against residential housing.

Georg Reutter, the freshly-appointed President of the VdP, said "We are currently undergoing the long-awaited phase of price correction". He said the VdP expects prices to continue to fall for both commercial and residential properties through 2023 by up to 20%, without a corresponding increase in demand for real estate and financing.

Last year the VdP banks lent a total of €158.5bn, down from the previous year's €178bn. But within these figures, the stark fall in residential lending was noticeable - at €98.2bn it was down 17% on the previous year's €118.4bn. Lending to commercial real estate was actually stable at about €60bn. And the year was literally a game of two halves, with the first half strong, followed by collapsing figures in the second half.

The VdP currently consists of 50 members, representing a 97% share of all issued Pfandbriefe in circulation. The German Pfandbrief has always been pitched as the safest form of covered bond for refinancing, with a long historical track record. Reutter played down any dangers of infection from the recent banking troubles in the USA and in Switzerland, saying that those countries' central banks had acted swiftly to calm the situation. "The senior mortgage loan and the Pfandbrief had nothing to do with the recent turmoil and will presumably not be the trigger of any next crises," he said.

The VdP's CEO Jens Tolckmitt said that financial watchdog BaFin needed to ease up on its recently tightened capital requirements for real estate financing. Since 1st February, the so-called anti-cyclical capital buffer and the systemic risk buffer apply to residential real estate lending. In effect, what this means is that credit institutions must now back the financing they provide with 0.75% and 2% more capital, respectively. 

The Bundesbank calculates that these additional burdens amount to around €22bn. "This amount of tied-up equity is therefore not available to the institutions for lending," said Tolckmitt. The measures are counter-productive, he said, and would lead to both home ownership and rental housing becoming both more difficult and more expensive.

The VdP's figures seem to confirm that rising interest rates and inflation have put an end to Germany's long property boom, with large numbers of people now unable to afford a house or an apartment. Last year the Federal Statistics Office's Q4 figures saw residential prices falling by 3.6% year-on-year - the first annual price decline since the end of 2010.

While there is no unanimity among all the bodies that track German residential house prices - and in any event many figures are general, and not localised - there is some evidence that this year's Q1 saw a slight further falling back in property prices. Mortgage broker [[Interhyp]] puts the current nationwide average price for a financed property (including ancillary costs) at €464,000, down from €472,000 in Q4 of 2022. Other sources see prices stabilising in this quarter (see article on Europace in this issue). 

Much also depends on the energy-efficiency of a property, along with its micro-location and other factors. According to Interhyp's analysis, "Prices continue to fall for properties built before 1990 that are less energy-efficient." For properties built after 2010, they say, the price declines are smaller: between Q4 of 2022 and Q1 of 2023, there has even been a slight increase.

Lending rates for real estate have risen sharply over the past year, now averaging 3.75% for ten-year loans, according to Interhyp. They expect interest rates to fluctuate between three and four per cent over the course of the year, with short-term swings above the four per cent mark possible.

As for the VdP banks, while lending volumes are down, demand for German Pfandbriefe remains high. The VdP banks registered issues worth around €15 billion between January and the end of February this year, a level that was last recorded in 2011, with the focus on maturities of three to five years at 46%, compared with five to seven years at 39% in 2022.