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2019-06-13 06:52:16
- #1
Germans are increasingly buying houses and apartments on credit. They are committing to very long-term obligations for this. At the same time, their collateral has been shrinking for years. The development carries risks.
3
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More and more Germans are realizing their dream of their own four walls – and buying on credit. The value of mortgage loans granted to private households in this country has grown to more than 1.2 trillion euros. That is an increase of almost 30 percent compared to 2011. And there is something else special: they are taking on significantly longer-term obligations. Meanwhile, almost half of all newly concluded loans run for more than ten years, according to a recent study by Deutsche Bank.
This trend is not entirely without risk: if interest rates rise and prices for houses and apartments fall, things could become uncomfortable: refinancing becomes more expensive, loans risk default, and collateral loses value. If interest rates rise significantly before the loan expires, consumers may benefit, but banks get into trouble: they have to pay more for freshly borrowed money than they receive for the long-term loans. The supervisory authority is already on alert.
The strong growth in mortgage loans in recent years was mainly fueled by the good economic situation and low interest rates. Many people simply did not know what to do with their money. Many investment forms were unattractive because they hardly yielded any returns. And stocks, which did increase significantly, were too risky for many Germans. They therefore preferred to flee into real estate.
Source: Infographic WELT
This has led to enormous price increases in the real estate market. From 2010 to 2018, apartments and houses became on average 50 percent more expensive; in large cities, it was almost a doubling. To buy a property, many Germans therefore need significantly higher loans than ten years ago. At the same time, it has rarely been so cheap to go into debt. According to calculations by Deutsche Bank economists, the annual interest burden of households has fallen from just under 54 to 30.5 billion euros since 2003.
Especially in the first quarter of 2019, many Germans increased their debts. They took out 8.8 billion euros in additional mortgage loans, 4.2 percent more than in the same quarter the previous year and the highest value since the turn of the millennium. If this continues, according to Deutsche Bank experts, the increase in mortgage loans could reach a total of 55 billion euros this year.
And these will be mostly long-term – the majority of German private property owners traditionally agree on terms of at least five years. Only about 2.5 percent of homeowners conclude short- and medium-term loans. It is currently hardly worth it anyway because long-term loans are very cheap and lie only one to three basis points above the average interest rate for all mortgage loans – so these are small differences in the decimal places of a percentage point.
Source: Infographic WELT
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Variable mortgage interest rates have even been above long-term interest rates since 2015. Long-term loans have the advantage that German homeowners can sleep much more peacefully because they have planning security and do not need to worry about refinancing for the foreseeable future.
After all, due to mostly long-term loan agreements, they are hardly exposed to interest rate risk. The share of existing mortgage loans for which private households must negotiate new interest conditions within the next two years is currently below 13 percent, which is significantly less than in the past.
Source: Infographic WELT
And because interest rates are currently so low, many Germans want to secure them for as long as possible. They are therefore increasingly borrowing for longer than ten years. Their financings probably will not run out before 2025 at the earliest. Possibly their loans will then be completely repaid and the interest rate risk will disappear entirely.
If not, the loans must be renegotiated. This may be manageable for the individual. However, the experts from Deutsche Bank are optimistic here: this risk would only affect part of the households in the medium term.
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READ ALSO
REAL ESTATE FINANCING
Those who repay properly now will be debt-free in 20 years
For the banks, the increase in loan volumes mainly means more business. However, the market is competitive, which puts pressure on margins. At the same time, the institutions are increasingly uneasy and have tightened their lending standards for the first time in three years.
Until now, the required collateral has decreased. In 2011, more than half of new mortgage loans were fully secured by land charges or financial assets; now this only applies to just over 40 percent of new contracts. Deutsche Bank experts are uncertain about the reasons. "Possibly banks, given the general economic growth and good labor market situation, demand full collateral less often."
Banks must secure risks with more equity capital
Nevertheless, they view this development critically. After all, there is the risk that the bank suffers losses in the event of borrower default. In view of the growing loan volume, the supervisory authority has reacted: banks are to secure their loans with additional equity capital by next autumn – with a so-called countercyclical capital buffer.
As reasons, the Financial Market Stability Committee named increased geopolitical uncertainty alongside explicitly risks from real estate financing and interest rate risk. In the event of a correction in real estate prices, the collateral for the loans would lose value. Furthermore, an interest rate increase would raise the interest burden on borrowers.
3
Advertisement
More and more Germans are realizing their dream of their own four walls – and buying on credit. The value of mortgage loans granted to private households in this country has grown to more than 1.2 trillion euros. That is an increase of almost 30 percent compared to 2011. And there is something else special: they are taking on significantly longer-term obligations. Meanwhile, almost half of all newly concluded loans run for more than ten years, according to a recent study by Deutsche Bank.
This trend is not entirely without risk: if interest rates rise and prices for houses and apartments fall, things could become uncomfortable: refinancing becomes more expensive, loans risk default, and collateral loses value. If interest rates rise significantly before the loan expires, consumers may benefit, but banks get into trouble: they have to pay more for freshly borrowed money than they receive for the long-term loans. The supervisory authority is already on alert.
The strong growth in mortgage loans in recent years was mainly fueled by the good economic situation and low interest rates. Many people simply did not know what to do with their money. Many investment forms were unattractive because they hardly yielded any returns. And stocks, which did increase significantly, were too risky for many Germans. They therefore preferred to flee into real estate.
Source: Infographic WELT
This has led to enormous price increases in the real estate market. From 2010 to 2018, apartments and houses became on average 50 percent more expensive; in large cities, it was almost a doubling. To buy a property, many Germans therefore need significantly higher loans than ten years ago. At the same time, it has rarely been so cheap to go into debt. According to calculations by Deutsche Bank economists, the annual interest burden of households has fallen from just under 54 to 30.5 billion euros since 2003.
Especially in the first quarter of 2019, many Germans increased their debts. They took out 8.8 billion euros in additional mortgage loans, 4.2 percent more than in the same quarter the previous year and the highest value since the turn of the millennium. If this continues, according to Deutsche Bank experts, the increase in mortgage loans could reach a total of 55 billion euros this year.
And these will be mostly long-term – the majority of German private property owners traditionally agree on terms of at least five years. Only about 2.5 percent of homeowners conclude short- and medium-term loans. It is currently hardly worth it anyway because long-term loans are very cheap and lie only one to three basis points above the average interest rate for all mortgage loans – so these are small differences in the decimal places of a percentage point.
Source: Infographic WELT
Advertisement
Variable mortgage interest rates have even been above long-term interest rates since 2015. Long-term loans have the advantage that German homeowners can sleep much more peacefully because they have planning security and do not need to worry about refinancing for the foreseeable future.
After all, due to mostly long-term loan agreements, they are hardly exposed to interest rate risk. The share of existing mortgage loans for which private households must negotiate new interest conditions within the next two years is currently below 13 percent, which is significantly less than in the past.
Source: Infographic WELT
And because interest rates are currently so low, many Germans want to secure them for as long as possible. They are therefore increasingly borrowing for longer than ten years. Their financings probably will not run out before 2025 at the earliest. Possibly their loans will then be completely repaid and the interest rate risk will disappear entirely.
If not, the loans must be renegotiated. This may be manageable for the individual. However, the experts from Deutsche Bank are optimistic here: this risk would only affect part of the households in the medium term.
Advertisement
READ ALSO
REAL ESTATE FINANCING
Those who repay properly now will be debt-free in 20 years
For the banks, the increase in loan volumes mainly means more business. However, the market is competitive, which puts pressure on margins. At the same time, the institutions are increasingly uneasy and have tightened their lending standards for the first time in three years.
Until now, the required collateral has decreased. In 2011, more than half of new mortgage loans were fully secured by land charges or financial assets; now this only applies to just over 40 percent of new contracts. Deutsche Bank experts are uncertain about the reasons. "Possibly banks, given the general economic growth and good labor market situation, demand full collateral less often."
Banks must secure risks with more equity capital
Nevertheless, they view this development critically. After all, there is the risk that the bank suffers losses in the event of borrower default. In view of the growing loan volume, the supervisory authority has reacted: banks are to secure their loans with additional equity capital by next autumn – with a so-called countercyclical capital buffer.
As reasons, the Financial Market Stability Committee named increased geopolitical uncertainty alongside explicitly risks from real estate financing and interest rate risk. In the event of a correction in real estate prices, the collateral for the loans would lose value. Furthermore, an interest rate increase would raise the interest burden on borrowers.