Germany Fights Soaring Home Prices With Curbs on Mortgage Lending

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

“Vulnerabilities to negative economic developments and especially to the residential property market have built up” in Germany’s financial system, the regulator said. 

Germany faces a similar predicament to economies around the world, including the U.S., where efforts to support the economy during the pandemic helped spark a surge in property investment. In China, a crackdown on housing speculation amid booming prices is weighing on the nation’s growth prospects.

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

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

There is concern that the ECB’s reluctance to raise interest rates is fueling a speculative frenzy among investors in property and other areas. While the ECB oversees monetary policy in the euro area, individual countries have the ability to impose so-called counter cyclical buffers to fine-tune local financial conditions. 

German house prices have surged during the pandemic, rising almost 60% above their 2015 levels, according to the federal statistics agency Destatis. Prices jumped by 12% year-over-year in the three months through September, one of the fastest growth rates in Western Europe.

German household debt has also increased sharply, rising to around 58% of gross domestic product in the middle of last year from 53% of GDP in 2019, according to the Bank for International Settlements, a consortium of central banks. That is still lower than the U.S., where household debt was around 79% of GDP last year.

BaFin said it would ask German lenders to set aside a capital buffer worth 2% of the risk-weighted assets on loans secured by residential property, up from zero at present. Banks will also need to set aside 0.75% of the risk-weighted assets on domestic risk positions, also up from zero, it added. The buffers are intended to absorb possible future losses.

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

The regulator warned that it might issue binding loan restrictions if it judged that lending standards had become too relaxed, including an upper limit for the proportion of debt in residential property financing.

“With these capital buffers, we not only take account of cyclical risks, but also precisely counter the specific financial stability risks on the residential property market, where price and credit growth are currently very strong,” said BaFin President Mark Branson.

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 there will likely fall in future. Frankfurt topped the list of 25 global cities, while Munich was in fourth place. The most overvalued U.S. city, Miami, was in 12th place.

Write to Tom Fairless at [email protected]