The German Economic Institute has warned that the country may be facing a bubble in its housing market that could not only affect countless Germans but may also precipitate a financial crisis.
The Cologne-based organisation has released a new study, An Analysis of the Current Risk Levels in Residential Real Estate Financing in Germany, that looks at the increasing risks taken by housing buyers and the development of credit volumes and products.
While the volume of loans has risen, the paper found that this has remained in line with other countries, house prices, and interest rates. It also cited the fact that lending in recent years has grown less than might be expected.
However, the risk profile has changed.
As Handelsblatt reported: “In the study, the [German Economic Institute] emphasises that the public, but above all central banks and supervisory authorities, have become more aware of the special importance of real estate financing when it comes to financial stability since the global financial market crisis – which was triggered by a crisis in the US real estate market in 2008.”
Prof. Dr. Michael Voigtländer, head of the research unit financial and real estate markets for the German Economic Institute, and who co-authored the study, wrote: “A risk analysis for follow-up financing shows that interest rate risks have increased over the years but are still relatively moderate. However, the proportion of loans with a loan-to-value ratio of more than 100% is striking. In view of this, it is important that banks insist on an adequate minimum repayment rate.”
Voigtländer’s work comes weeks after Handelsblatt reported that Germany’s Bundesbank was becoming increasingly alarmed by lending practises in the real estate market. In an interview with the paper, Prof. Joachim Wuermeling, who sits on the executive board at the bank, said that more and more mortgages were being written, despite people having less equity.
This, said Wuermeling, comes as half of all mortgages are being offered with interest rates fixed for 10 years.
Wuermeling said: “In the middle of an interest rate turnaround, banks would still have very low-interest loans on their balance sheets for a few years but would have to pay higher interest rates for refinancing.”