With the own home into ruin

An interesting article from Financial Times Deutschland that perhaps some potential home builders with little or no equity should read...

With the Home into Ruin 07.09.2012, 14:38 | Financial Times Deutschland

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More and more citizens want to build, but the risks are increasing (Source: dpa)

Home buyers have to provide less and less of their own money for financing. Their debt is rising dramatically – and so is the credit default risk.

Increasing credit risks The real estate boom entices buyers of condominiums and homes as well as banks and savings banks to take on ever higher credit risks. This is shown by new studies from market players and observers. "The default risk for banks and borrowers has increased significantly because homebuyers increasingly need to bring less equity," says Ralf Weitz, managing director for the construction financing division at the online broker Immobilienscout24. "The development is worrying," confirms Stephan Scharfenorth.

Equity ratio continuously decreasing According to an evaluation of 12,000 loan inquiries by Immobilienscout24, the share of the purchase price that buyers of condominiums and single-family homes can cover from their savings has steadily declined over the past years.

Example Munich: In the Bavarian state capital, apartment buyers still paid 27 percent of the purchase price with available own funds in the second quarter of 2010. "In June of this year, the equity on average was only enough to cover 17 percent of the property price," says Weitz. In transactions on the Berlin market, the average equity ratio of buyers has shrunk since early 2011 from 23 to twelve percent.

Real estate prices rise simultaneously At the same time, real estate prices have recently increased massively. In Munich, condominiums rose on average by four percent per year from March 2007 to July 2011. Since then, however, prices have increased by twelve percent. "The momentum has tripled within the past year," says Weitz. In Berlin, prices rose by only 14 percent from 2007 until summer of last year. In the past twelve months, however, they shot up by 15 percent.

As a result, the average value of acquired properties alone from February to July of this year rose by 5.6 percent from 187,658 euros to 198,753 euros. In addition, the equity ratio of private real estate buyers fell on average to only 13 percent in June of this year.

A wave of foreclosures could follow "The real estate boom and the low building loan interest rates are increasingly tempting households with low incomes and correspondingly low savings to buy property," says managing director Scharfenorth. This poses high risks for buyers and the financing banks and savings banks. "If interest rates rise over time, the follow-up financing for these threshold households comes into danger," says Scharfenorth.

This could, as previously in the USA, Great Britain, Ireland, and Spain, end in a wave of foreclosures. In these countries, the price increase for houses and apartments from 2001 to 2007 increasingly attracted buyers with low savings to the market. When interest rates rose, they could no longer service their loans. Distressed sales and foreclosures caused the speculative bubbles to burst. Banks repeatedly got into distress, which eventually culminated in the global financial crisis in autumn 2008.

Concrete money boom was a consequence of the financial crisis In Germany, it was precisely the then crash on foreign real estate markets that triggered the current concrete gold boom. Wealthy private investors formed the first wave of buyers. After the outbreak of the financial crisis, they pulled their money out of stocks and bonds to invest it in condominiums. The resulting price increase is now increasingly attracting investors in residential real estate who only have limited savings. This is also due to the advertising of banks and sales organizations, says Weitz. "The marketing promotes entry into real estate and loans despite increased risks."

Yes, no equity, low interest rate, 1% repayment and - or much more because of - 10 years term, means afterwards for quite a few: sink or swim. Those who do not consider the interest rate market on average and cannot or could not even remotely meet this average should not buy / build today either.

With the current interest rate, the motto should still be: moderate loan amount with moderate equity, long terms (even if the interest rate is therefore higher), high repayment (ideally no remaining debt after the fixed interest period).

One should avoid buying / building without any sense and understanding just because the interest rate is good. Unfortunately, this article shows that many switch off their brain when they hear that supposedly one can buy a single-family house for under €1000/month and without equity.

30 years duration is very reassuring.

somehow a stupid article.....

don’t get me wrong, of course it’s not good to finance a property with 1% repayment and a 10-year term, because that’s the only way you can afford the monthly rate...

but what this has to do with the equity capital I just can’t quite get...

in the past people had 27% equity capital, today only 17%... at the same time it is written that prices have exploded in recent years... sure, if building becomes 10% more expensive per year then the equity ratio decreases... or does someone here get 10% interest p.a.?

equity capital is basically almost irrelevant in such a calculation... whether I borrow 70% or 90% no one can say who is better off initially... the one with 70% had to pay 7% interest back then, the one now with only 90% has 3% instead...

who has the higher risk of default now?

whoever today desperately tries to save equity capital while earning enough income to build has the greatest chance of just losing money.... you fight against inflation and sharply rising construction costs while you yourself only get meager interest on your savings...

what matters is how much you earn and how much you borrow at what interest rate and which term.... that has to match!

With rising costs for buying/building a house, it should become too expensive for more and more people to acquire a home. However, nowadays more and more people who actually cannot afford such a home are buying/building one. This very group, called threshold households in the article, usually faces problems with financing, provided they manage almost nothing with 1% repayment and cannot cope with higher interest payments after 10 years. The blame still lies with the people themselves. Oh no, the evil banks that push the wrong product on the poor customers...

With rising costs for buying/building a house, it should become too expensive for more and more people to acquire a home.

not if at the same time loan interest rates drop dramatically... and that was/is exactly the case...

Even "in the past," financing over 70% was common... if it is now 80-90%, that is more than offset by the halving of loan interest rates...

The problem is that many build according to the principle of the largest possible house... meaning the favorable conditions in the financial market are used to afford "more" house instead of paying it off faster...

That these "threshold households" get financing that can only backfire is, in my opinion, the fault of the banks... why do they sell such a product to them? Of course, that is bound to end badly... but that has nothing to do with the equity, etc. that the article keeps harping on about...