Absurd new laws on German mortgage lending likely to do real damage

The German press is full of stories about the burgeoning asylum bureaucracy strangling attempts to normalise the existence of more than a million refugees. But what we didn't fully realise was just how difficult it can be to reverse the bureaucratic machinery, once set in motion.

A Chinese tourist called Mr. Jun Liang tried to report a stolen wallet at Stuttgart airport recently, and unwittingly filled out an asylum request application.

Speaking only Mandarin, he had his passport and visa taken away, underwent a medical examination, had his fingerprints scanned, and was transported by bus with 50 other refugees from North Africa, Syria and the Middle East to a refugee centre in Duelmen, near Münster.

There he was given a bed, fed daily, and took part in the camp's daily routine, even receiving pocket money from the camp authorities. However, despite the language impasse, suspicions were gradually aroused because of his unusual "respect for authority", and because he was so well-dressed.

However, the camp commandant finally acted only after Mr. Liang kept asking to get his passport back – "which is the opposite of what most refugees do."

With a Google translation app and help with interpretation from a local Chinese restaurant, the matter was finally cleared up after 12 days, and Mr. Liang was free to leave the camp and continue his holiday into France and Italy. When asked, he told reporters that he'd imagined Europe would be different to how he'd found it.

We're not surprised. A lot of Europeans are finding Europe very different to how they imagined it, too. This week the Bundesbank suggested that the legal retirement age in Germany needed to be raised to 69 from its current 67 to ensure that pensioners won't suffer a hefty drop in their expected payouts.

Despite the influx of refugees, German demographics are such that the average age in German is continuing to rise, while overall the population will continue to fall. This will put even greater stress on the pension system, which despite recent reforms won't offer much protection to citizens who aren't availing of state-supported supplementary private insurance.

Part of the government's solution is to encourage higher levels of home ownership, in a country which still ranks at the bottom of the European list - with only Switzerland having less homeowners. Germans appear to be getting the message, and with interest rates at rock-bottom, have been piling in over the last few years to make up for lost time.

But now it looks as if the government has again unwittingly put a spoke in the mortgage financing wheel. As we report in this issue, two key demographic groups who represent the backbone of the borrowing community – young marrieds and the elderly – are finding the path to mortgage finance blocked by overzealous legislators. In parts of Germany the level of mortgage lending has fallen by up to 30%, we hear, since the law came into effect at the end of March.

Private individuals aged 60 or over are now barred from longer-term borrowing by a rigid German interpretation of an EU directive which states the borrower must be around to fulfill the terms of the loan commitment - personally, and to the very last day. Otherwise, no cigar.

The same stipulation, §505a of the German Civil Code or BGB, decrees that banks can only lend to young couples when they can clearly see the path ahead for the young couple for each of the next 30 years. No possible risk should be undertaken by bank lenders in the likelihood of there being some deviation from this future plan. Children at some stage? Not good for your credit application, I'm afraid.

If the current absurd situation is not resolved by the German coalition government by its own hand, it won't take long for an appeal to the constitutional court on the grounds of discrimination. In the long run it's hard to see how the current situation is defensible.

Still, the compliance culture – once entrenched - is hard to overturn. The 'jobsworths' will be out in force, finding worrisome details in loan applications that make it easier to take the risk-free route. After all, the law now allows that if a bank does grant a loan in contravention to the guidelines, the borrower can later demand an interest rate the same as the bank's refinancing rate, or cancel the loan agreement without paying any early repayment charges. All very undesirable, from the bank's perspective.

Meanwhile, we've been given plenty of food for thought by Pascal Lamy, the former director-general of the World Trade Organisation until 2013, and an upcoming keynote speaker at EPRA's annual conference in Paris in September.

In a recent interview with EPRA Magazine, Lamy says he believes the "paradise period" of Europe's current real estate investment cycle is probably over. Europe's central banks have exhausted their options in fostering growth, and few governments have budgetary leeway to provide a catalyst to their economies, he believes.

Germany is one of very few countries with scope in its public finances to boost growth, but its policy-makers are reluctant to do so because of the demographic challenges facing the country. Lamy is convinced that this has created a long-term saver mindset in government circles, now deeply entrenched. While the vast influx of asylum-seekers will inevitably lead to a shift in public policy, it will take time to prise open the purse-strings to house, educate and train the new arrivals.

What ever would Mr. Liang, the displaced Chinese tourist, have made of it all? Given his reticence – and the linguistic barrier - we'll likely never know. Probably he's just glad he didn't have to stay around long enough to find out.