The current economic parameters, including the low building finance rates or rising property prices in Germany, have stirred fears of a real estate bubble among potential homeowners: At first glance, the facts and circumstances seem to manifest eerie similarities to the situation in the United States ahead of the financial crisis of 2007-2008, or so the argument goes. A survey compiled by the IW German Economic Institute has recently sounded the all-clear signal, elaborating which aspects defuse the anxiety over the looming formation of a real estate and mortgage bubble in the eyes of the experts.
German Property Buyers Loath to Accept Risks
According to the survey, German property buyers are prudent in the ways in which they take advantage of the current low-interest cycle. In 2008, building loans with low or no initial redemption in combination with a variable interest rate led to a situation in the crisis countries where borrowers proved eventually unable to make their payments anymore and lost their homes to the banks. But as property values deteriorated, the banks proved unable to cover the debt through foreclosure sales. The situation eventually precipitated a global crisis. The approach lately pursued by German property buyers, however, present an altogether different picture. Instead of considering higher gearing ratios, borrowers exploit the interest rate trough to repay their building loans sooner. While the initial redemption rate before the crisis averaged one percent, the going rate in construction finance now exceeds two percent during the first year of repayment in one of three cases. In addition to the high initial redemption rate, there is also a demonstrable trend among home buyers to negotiate extended fixed-interest periods with their banks. Both of these funding trends illustrate the low risk tolerance among German borrowers of building loans.
Borrowers Better Protected Now
In the run-up to the crisis, banks had moreover granted loans to clients of poor credit ratings, exacerbating their financial situation even further. It is another aspect where the IW survey shows the contrast between 2008 and now as it highlights the probity of German property buyers in the form of financial and social safeguards. The latter tend to be around 50 years old, married, and employed full time. Since Germans also tend to take their time before contemplating homeownership, they bring stronger collateral to their loan negotiations.
German Banks Putting Safeguards in Place
The survey goes on to say that Germany’s lenders have become just about as risk wary as the borrowers. German banks impose strict constraints on building loans. As early as March 2016, Germany wrote a European Union guidance into German law by passing the Mortgage Credit Directive (WIKR) whose purpose is to subject the liquidity of potential borrowers of building loans to closer scrutiny before a loan is awarded. The survey also observed that the lending volume in Germany is not alarmingly high. In fact, it does not even exceed the average, as was the case at the onset of the crisis in Spain.
No Further Intervention Required
With a view to the safeguards installed by the banks and the prudent buyer behaviour, the survey authors consider the situation in Germany robust and innocuous. The upshot being that the German home financing market simply does not bear comparison with the situation in the crisis countries of 2008.