Germany Fights Soaring Home Prices With Curbs on Mortgage Lending

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As in the US and other economies, pandemic financial aid has increased asset investment and borrowing in the country.

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Germany’s Federal Financial Supervisory Authority, or BaFin, on Wednesday warned lenders to be conservative in their mortgage loans given a quick rise in prices, and said borrowers would be able to make their monthly mortgage payments even when interest rates rise. Should be. It also ordered local banks to hold additional capital against residential mortgages.

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“Negative economic growth and particularly the weaknesses of the residential property market are built into Germany’s financial system”, the regulator said.

Germany is facing a similar situation to economies around the world, including the US, where efforts to support the economy during the pandemic fueled a surge in asset investment. In China, crackdown on housing speculation amid rising prices is taking a toll on the country’s growth prospects.

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Housing bubbles are at the root of many financial crises, including the global financial crisis of 2007-08.

The move to curb access to mortgages is a form of financial-system tightening that targets a specific segment of the economy. The European Central Bank has announced the withdrawal of its massive pandemic-era bond-buying programs, but has been less aggressive than the Federal Reserve about raising benchmark interest rates. The Fed is expected to raise rates several times this year while the ECB has promised to keep its deeply negative rates for an extended period.

There are concerns that the ECB’s reluctance to raise interest rates is fueling a speculative frenzy among investors in property and other sectors. While the ECB oversees monetary policy in the euro area, individual countries have the ability to impose so-called countercyclical buffers to correct local financial conditions.

According to the federal statistics agency Destatis, the prices of German homes during the pandemic have increased by about 60% from 2015 levels. Prices rose 12% year-on-year in the three months through September, one of the fastest growth rates in Western Europe.

According to the Bank for International Settlements, a consortium of central banks, there has also been a sharp increase in German domestic debt, which accounted for about 58% of GDP in the middle of last year, up from more than 53% of GDP in 2019. Is. This is still less than the US, where domestic debt last year stood at about 79 per cent of GDP.

BaFin said it would ask German lenders to set aside a capital buffer of 2% worth of risk-weighted assets from the current zero on loans secured by residential property. It added that banks would also have to zero in on 0.75% of risk-weighted assets on domestic risk positions. The purpose of buffers is to absorb potential future losses.

BaFin said banks will have time to adjust to the new requirements, which will take effect early next year, and will preserve about €22 billion, equivalent to $25.02 billion, of core capital in the banking system. Banks will generally be able to meet the new requirements from the existing additional capital, although some institutions will need to raise fresh capital, it said.

The regulator has warned that it may issue binding credit restrictions if it decides that lending standards, including an upper limit on the ratio of debt in residential property financing, have been relaxed too much.

Mark Branson, President of BaFin, said, “With these capital buffers, we not only take into account cyclical risks, but also more accurately counteract the specific financial stability risks on the residential property market, where value and credit growth are present. I’m very strong.”

German cities were at or near the top of an annual real-estate bubble index published by Swiss bank UBS last October, suggesting that property prices are likely to fall in the future. Frankfurt topped the list of 25 global cities, while Munich was ranked fourth. Miami, the US city with the highest value, was ranked 12th.

Write to Tom Fairless at [email protected]

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