Status: 25.11.2021 4:40 p.m.
The Bundesbank considers real estate prices in many places to be up to 30 percent higher than justified. She warns of dangers associated with real estate loans – especially as soon as interest rates rise again.
By Klaus-Rainer Jackisch, hr
The large building sign on the large property in Viersen, North Rhine-Westphalia, is emblazoned in bright colors: 38 new homes are to be built here on the edge of the field – purchase price: from 299,000 euros. It’s actually not worth the effort to put up the sign. Because most of the units have already been reserved, especially since the price is still relatively moderate.
Real estate prices are worrying the Bundesbankers
As in the 77,000-inhabitant city on the border with the Netherlands, the demand for one’s own four walls remains high throughout Germany – not only in the big cities, but increasingly also in the middle locations. The prices are rising accordingly: In the past year, they had increased by an average of 6.7 percent, the Deutsche Bundesbank said when it presented its latest report on financial stability. The trend is increasing. According to a survey, almost 90 percent of households expect real estate prices to continue to rise.
This worries the Bundesbank. Because the price explosion has meanwhile led to clear exaggerations and thus also harbors dangers: “The prices for residential property are ten to 30 percent higher than justified by fundamental data,” said Bundesbank Vice President Claudia Buch in Frankfurt am Main. So some of them are overrated. “And not just in the metropolitan areas.”
When interest rates change, things can get tight
From the Bundesbank’s point of view, rising real estate prices can become critical for financial stability if banks increasingly grant loans on generous terms and interest rates change. This was an aspect that was partly responsible for the financial crisis of 2008/2009, which is why central bankers, in their role as bank supervisors, are extremely sensitive on the subject.
In Germany around half of the bank loans for residential property have an interest rate fixation period of more than ten years. This is good for borrowers, but not necessarily for lenders, i.e. banks – especially not if inflation continues to rise to the point where general interest rates are likely to rise.
Discussion about changing the credit rules
For this reason, measures are currently being discussed that regulate lending to consumers more tightly – for example, by only allowing a certain percentage of income to be used to pay off debts, which in fact limits the loan amount desired to buy a house or apartment. A corresponding declaration of intent can be found in the coalition agreement of the future traffic light government.
The Bundesbank is not generally opposed to such ideas, but it also sees massive problems. Because “we are very aware that this is a significant encroachment on the freedom of contract,” says Bundesbank board member Joachim Wuermeling. In fact, this measure would dictate to the customer which credit agreement he may and may not conclude. At present, Wuermeling sees no reason for such strong interventions in the market and called on the banks to be more cautious in general and to take precautionary measures. The financial services regulator Bafin has the last word anyway.
The ECB assesses the situation similarly
The European Central Bank (ECB) also recently warned of the increasing risks in the residential property market. In the entire euro zone, prices rose more sharply in the second quarter than they have been since 2005. “Housing markets in the euro area have grown rapidly, with little evidence that credit standards have been tightened in response,” said Vice President Luis de Guindos. In Germany alone, the granting of mortgage loans grew by seven percent in the past quarter, according to the latest Bundesbank figures.
So the industry is getting more risky again. The underestimation of possible credit risks with a trend towards rising interest rates and overvalued assets could become the mixture that feeds a new crisis. All of this in a situation in which the awareness of risks has waned again in view of the relaxation of the corona situation in the summer.
German financial system stable in the pandemic
So far, however, the German financial system has come through the corona crisis very well and without major injuries. Contrary to expectations, there was no significant increase in bankruptcies – a consequence of the generous state aid and the lifting of the insolvency obligation, according to Bundesbank Vice President Buch. “The financial system has hardly suffered any losses and the banks’ resilience has not been seriously tested.” Lending also developed dynamically during the pandemic, so that there were no bottlenecks for companies.
Nevertheless, none of this is a reason to sit back and relax. In the face of rising risks again, the Bundesbank is calling for the banks’ “countercyclical capital buffer” to be expanded again. In times of brisk lending, this instrument is intended to create stronger reserves that can be used in the event of a crisis. The Vice-President of the Bundesbank, who has the chance to succeed her boss Jens Weidmann if he goes in December, is currently relying on reason and moderation. The next few months will show whether this appeal will reach the bank towers.