Housing Finance Market Overview
In Germany, housing finance is mainly raised from banks and Bausparkassen, with the savings bank group (including its Bausparkassen branch) taking the largest share with almost 37 per cent in 2009. In the year 2009, the value of outstanding residential mortgages equaled more than 1.1 trillion Euro. In real terms, the housing finance market has remained stable in Germany which is as well reflected in the quite constant though slightly falling ratio of residential mortgage debt to GDP. This ratio fell from 53.2 per cent in 2000 to 47.6 per cent in 2009.
The Market from the Perspective of the Demand Side
In Germany, the usual maximal loan-to-value (LTV) ratio amounts to 80 per cent. Yet, mortgages exceeding an LTV ratio of more than 60 per cent (the legal limit for a first lien) are offered by most banks only at the price of an interest increase. This is due to the fact that mortgages with an LTV of less than 60 per cent can be refinanced at better conditions by the bank. However, Bausparkassen can hypothecate up to an LTV of 80 per cent at favourable conditions and their loans are usually placed as second lien mortgages so that it can be conveniently combined with a first lien mortgage. Hence, housing finance in Germany is typically made up of three elements: 1. equity that the customer has at its disposal (20-30 per cent); 2. a mortgage provided by a (mortgage) bank (50-60 per cent); and 3. a loan provided by a Bausparkasse (20-30 per cent). The average LTV ratio is around 70 per cent and 60 per cent of the loans are fixed-interest loans (i.e. fixed for more than 5 years).
The German government supports homeownership by paying Bauspar customers on Bauspar deposits a government premium of maximal 45.06 Euro (married customers 90.11 Euro) per annum. Furthermore, the state-owned bank KfW offers subsidised mortgages.
House Price Development
Housing prices have remained quite stable over the past few years – the average annual house price growth for owner-occupied housing from 2000 to 2007 was less than 4 per cent. Also because of this fact, house prices have been not affected so far by the financial crisis and remain stable. Yet, in certain areas house prices show a negative tendency due to negative demographic trends.
Special Characteristics of the Market
Germany has a contractual savings system, called the Bauspar system which is characterized by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. All terms of the contract, including interest rates on savings and the loan, are specified at the conclusion of the contract.
The government grants an interest premium equal to 8.8 per cent of the amount saved on a contractual savings account account (up to a set maximum).
Deposits are a main source of refinancing for banks and even more so for the Bausparkassen. Short-term deposits and current checking accounts continue to offer a stable, low cost source of funding for the banks and Bausparkassen. Banks also fund lending activities through the issuance of bank bonds or the issuance of Pfandbriefe (Covered Bonds). Outstanding Covered Bonds equaled to 19.6 per cent of all outstanding residential lending in 2009. Funding mortgage loans through Pfandbriefe is legally constrained by an LTV limit of 60 per cent. The securitisation of mortgages plays only a minimal though possibly growing role in Germany (2009: 1.8%).