Loans are becoming increasingly risky
Bundesbank considers steps against real estate bubble
04/06/2022 11:14 am
With real estate prices rising, some of them extremely, the risk that buyers and banks take on when financing is growing. The Bundesbank is currently considering various measures to contain the risk to the financial sector.
Because of the skyrocketing prices on the real estate market, the banking supervisory authority could take additional steps to contain the dangers for financial institutions. “If further excessive risks build up, we reserve the right to adjust the buffers or to use other instruments instead,” said Bundesbank board member Joachim Wuermeling in an interview with the “Handelsblatt”. According to Wuermeling, for example, in order to avoid high-risk real estate loans, it could make sense to limit the amount of debt.
The Bundesbank board of directors, which is responsible for banking supervision, is considering setting an upper limit on the LTV ratio (“loan to value”), which is important in real estate financing, as a possible instrument. This reflects the relationship between the amount of the loan and the value of the property. The higher the rate, the riskier the loan is for the bank. Wuermeling’s considerations point in the same direction as the most recent recommendations of the European Systemic Risk Board (ESRB). He had suggested that an upper limit for the LTV quota should be introduced in Germany.
“Against the background of sharply rising prices, housing construction loans have simply become more risky because the trend can quickly reverse,” said Wuermeling. The debt of homebuyers is increasing. “These finance an ever-increasing proportion of their acquisition costs through loans and bring less and less equity with them,” he warned. Market data indicated that in new business, the loan amount exceeded the purchase price of the property in almost ten percent of cases. “Home prices have decoupled from income growth,” he said. The share of debt service in disposable income has continued to rise and was recently 29 percent.
Higher capital buffer from April 1st
According to Wuermeling, the share of residential real estate financing in bank balance sheets has also increased enormously. “It is now 35 percent of all bank loans,” he explained. This is also a consequence of the price increase. “And the trend continues,” he said.
The Bundesbank has been warning of overvaluations on the real estate market for years. The strong price increases in Germany and other European countries recently also alarmed the EU Risk Council ESRB. In this country there is a rise in house prices across the board, warned the committee based at the European Central Bank. The financial regulator Bafin has already introduced stricter rules for financial institutions. It has decreed that Germany’s banks must save up an additional capital buffer over the next twelve months as a precaution against possible setbacks, for example on the real estate market. An additional buffer was introduced on April 1, which specifically protects residential real estate loans.