Deferral of post-Corona personal insolvencies distorts size of problem
New full-year figures from specialist publisher Argetra Verlag, which tracks the foreclosure industry, predicts the number of distressed sales of properties is likely to rise through 2023 (and 2024). But, somewhat surprisingly, the ACTUAL number of property foreclosures by banks throughout Germany was 9% lower last year than in 2021.
In all, a total of 12,077 properties were foreclosed upon in 2022, down from 13,163 in 2021 ()at a market value of €2.9bn), according to Argetra. This was partly due to the number of consumer insolvencies falling by 17.3% to 63,500, mainly due to Corona-related deferrals, and owners selling off troubled assets before banks started foreclosure proceedings. However, the market value of the auctioned properties rose substantially, by 14.9% to €3.36bn.
The Ratingen-based Argetra tracks foreclosure auctions at nearly 500 district courts across Germany. In August last year, Walter Ruesch, CEO at Argetra, warned that a wave of defaults IS building up, suggesting that, with the usual processing time of up to a couple of years, the number of foreclosures is likely to become apparent in 2023 and 2024.
Many middle-income earners who may have bought in the last few years, may now be pushing their financial resources to the absolute limit, he suggested. The rise in interest rates, high inflation and wobbling consumer confidence could force many homeowners to the wall, believes Ruesch, with little room for renegotiation with financing banks.
"The fact that around 40% of these financings are structured variably means that financing costs are likely to explode as interest rates rise," said Ruesch. "Irrationally inflated real estate prices increasingly form an explosive cocktail with recklessly awarded financing."
A close analysis of the reasons for the foreclosures is also enlightening. 'Partition' auctions - where the ownership structure is breaking up for reasons of marital breakdown or dissolving inheritance communities - are increasing. More than €1.6bn (49%) of the total €3.36bn raised were due to these reasons, up from 44% the previous year. This represented 51% of land and 38% of detached and semi-detached house sales.
Despite the slight downturn in residential property prices at the end of 2022, the category still respresented the most frequently auctioned property type.
As a rule, about 50% of bank foreclosures end up in the courts, with the remaining half being sold off privately beforehand. The number of foreclosures has been falling steadily over the last few years with Germany's healthy economy and record-low interest rates, which held servicing costs down and demand for property ownership high. So high, in fact, that many forced sales achieved prices above market prices, while the days of really dirt-cheap deals for habitable accomodation are long gone.
North Rhine-Westphalia, Germany's most populous state, makes up about 20% of the total foreclosure market. Proportionally, the highest number of court-appointed foreclosure was in Saxony, at 28 per 100,000 households, nearly three times higher than in prosperous Bavaria, at 10 per 100,000. The average across Germany was 15 per 100,000 households, unchanged from 2021. The national average price paid was €278,254, compared with €222,165 in the previous year. Average market values increased in all federal states.
Properties at foreclosure auctions are generally offered at a minimum reserve price (Verkehrswertgutachten), which the public can view at the relevant court, along with any mortgages or claims (financial or otherwise) which any third parties may have on the property. However, in most cases it's not possible to do a thorough inspection of the property, with neither the bank nor the delinquent previous owner having a particular interest in on-site inspections.
For most forced sales, there are two appointments, making bidding for a property a bit like a poker game. At the first appointment, any bid that fails to reach 50% of the market value (reserve price) is withdrawn from sale. If the highest offer reaches only up to 70% of market value, the lender (generally a bank) is entitled to withdraw the property from sale, at his discretion. (Hence very keen bidders will generally offer north of 70% to try to clinch the deal.)
The really determined bidder waits until the second appointment, when there is no minimum reserve, and the property is sold to the highest bidder. Bidders might get lucky, if few competitors show up to bid for the asset, or they might end up owning a property whose actual value is even less than the assessed market price, since valuers have the same problem as other bidders in not gaining access to the property without the express permission of the owner.
A successful bidder has to provide a security of 10% of the market value on the day of the sale, with the remainder of the sale price being payable in full within six to eight weeks at the latest. Failure to pay this means the property is immediately returned to foreclosure, with the putative buyer becoming the new debtor.
