German Thrift Damps Lending as Cheap Money Is Distrusted

With a full-time job, no debt and a big savings account, Claudia Kuekelheim could have afforded a lot more house. Instead, the German office manager and her engineer husband used their credit to get a mortgage with predictable monthly installments they could pay more quickly.

“We probably could have gotten a 100 percent mortgage, but we want the house to be paid off before we retire,” said Kuekelheim, 42, who paid 24 percent up front and chose a higher interest rate because it’s fixed for 20 years. “We were worried that rates would end up being too high for us if we only fixed it for 10 years.”

Germans are taking out smaller home loans and repaying them faster as prudent borrowers and lenders bet that record-low interest rates and rising property values won’t last. The growing caution threatens to damp a surge in lending that’s pushed German mortgage volumes to the highest in 16 years, and comes as European countries including the U.K., Denmark and Switzerland enact policies aimed at stemming housing bubbles.

“The craziness we saw in other countries never took hold here,” said Nina Schrader, director of real estate at Deloitte & Touche LLP. “It’s a combination of the way banks operate and the fact that it wouldn’t occur to a private investor to get a 120 percent mortgage.”

Last month, the Bank of England introduced measures to limit riskier mortgages, while the Swiss government in January forced banks to hold additional capital to protect them against a real estate crisis. In Denmark, the central bank has been pushing to reduce borrowers’ ability to defer principal repayments.

Conservative Borrowers

Germans’ mortgage interest payments make up about 12.8 percent of their income, compared with an average 15.9 percent in the countries that share the euro, according to data compiled by the European Central Bank. The loan-to-value ratio of German homes is 41.9 percent, compared with an average 37.3 percent across the euro area.

Borrowers repay 2.46 percent of their loans each year, up from 2.36 percent in 2013 and the highest since at least 2009, according to Dr. Klein & Co. AG, a Luebeck, Germany-based mortgage broker. Average loans fell to 77.7 percent of a home’s purchase price from 78.6 percent a year earlier. By comparison, U.K. homebuyers’ loans average about 75 percent of the value of the home, according to data compiled by the Council of Mortgage Lenders, and in the U.S. that number is 82 percent, according to Ellie Mae, a California-based loan processor.

Price Gains

Demand for mortgages in Germany is being tempered by concerns that recent home-price increases can’t be sustained. Bundesbank President Jens Weidmann said last month that the first signs of a housing bubble may be appearing. Finance Minister Wolfgang Schaeuble said on June 19 that excessive liquidity is leading to “dangerous” developments in the market.

Prices in Germany’s largest cities, including Berlin, Hamburg and Munich, have risen more than 30 percent in the past five years, according to data compiled by Berlin-based research firm Bulwiengesa AG. Across Germany, prices have risen by an average of 5.7 percent per year since 2009, when the market began climbing for the first time since 1994.

Stable Roots

The price gains have been fueled by record-low interest rates that make it cheaper than ever to buy a home and not much more expensive than renting, according to Michiel Goris, chief executive officer of Munich-based Interhyp AG, Germany’s biggest online mortgage broker. Low rates have also slashed returns for bonds and savings accounts, making real estate investment a more attractive alternative.

The growing caution among buyers means that mortgage lending may decline this year amid circumstances similar to those that sparked borrowing sprees in other European markets.

German banks probably will provide 197 billion euros of new mortgages in 2014 if lending continues at the current pace, according to data compiled by Interhyp. That would be 0.5 percent less than in 2013, when there was a 3 percent increase from the previous year. The value of all outstanding German mortgages was 1.16 trillion euros in May, the highest level since 1998, according to data compiled by the Bundesbank.

A lack of lending growth would maintain Germans’ comparatively low level of indebtedness. Private household debt equals about 93 percent of net disposable income in the country, compared with about 325 percent in Denmark, 150 percent in the U.K and 151 percent in the U.S., according to data compiled by the Organization for Economic Cooperation and Development.

Missed Opportunities

While the stability of Germany’s housing market is envied in places that experience recurring booms and busts, people in the nation of 81 million may be missing a chance to boost their pension security.

German households had a median net wealth of about 51,400 euros in 2010, the lowest among countries sharing the euro, partly because of a low home-ownership rate and comparatively inexpensive real estate, according to the European Central Bank. That trails France’s 115,800 euros and Italy’s 173,500 euros.

Germany’s banks appear to be no more eager than borrowers to take on a lot more mortgage risk. At Commerzbank AG, the country’s second-largest lender, terms have become more stringent over the past year. Clients are now paying off 6.2 percent of their mortgage per year, compared with 6.1 percent a year ago, said Falko Schoening, the bank’s head of lending. About 75 percent of the mortgages have 10-year fixed rates.

‘Already Conservative’

“We haven’t had to make any adjustments to our credit strategy in the past few years based on regulations because we’re already conservative,” Schoening said. “Customers must be able to repay their loans even in times of higher interest rates.”

The bank’s 30 percent increase in lending last year stems from clients seeking profitable assets amid a dearth of alternatives, rather than looser standards, he said.

Bayerische Landesbausparkasse, Germany’s largest government-owned building society, now requires clients to repay at least 2 percent of their loan each year instead of the customary 1 percent, to guard against future interest rate increases.

Even the Bundesbank, which in a report in February warned that prices in cities may be overvalued by 25 percent, noted that gains aren’t fueled by lending and that banks are already becoming stricter.

Though real estate lending has reached new highs over the last two years, Germans’ conservative borrowing habits are deeply seated in regulations and culture. One German proverb translates roughly as “He who doesn’t honor the cent, doesn’t deserve the dollar.”

Historical Roots

The financial caution is often attributed to the hyperinflation that crippled the country’s economy in the 1920s, a connection reinforced by black-and-white photographs of people hauling cartloads of German marks to buy their groceries. In fact, Germany has been less financially volatile than many other developed countries, with only three asset bubbles in 150 years, according to Deutsche Bank real estate economist Jochen Moebert.

Germans don’t get a tax write-off for interest payments, and tax breaks for buying homes were abolished in 2006. That means there are few incentives for Germans to take on loans to buy a home, said Reiner Braun, a real estate analyst at Berlin-based research firm Empirica AG.

“Unlike in the U.S., we don’t have a provision that you can simply give back the key,” said Helmut Straubinger, Bayerische LBS’s head of lending. “We have personal-liability laws, which means that in some cases people will have to carry their debt with them their whole lives. That means banks have a certain responsibility.”

Renter Nation

A rental-friendly culture is also a factor. With one of Europe’s lowest home-ownership rates and a rental market that offers a diverse supply of apartments across all price levels, Germans feel little pressure to own a home, Braun said. Only 53 percent are owners, compared with 65 percent of Americans and 67 percent of Britons, according to data compiled by Eurostat and the U.S. Census Department.

Germans also move less frequently and, unlike Americans, don’t take out a second mortgage to pay for a vacation or a car, Braun said.

The low level of ownership could become a concern as Germany’s population ages and social security benefits are cut, Bayerische LBS’s Straubinger said.

“We have a historic chance to increase the home ownership rate,” he said.

Some are smart enough to plan ahead. Kuekelheim, the office-manager who bought a four-bedroom home near Stuttgart for 290,000 euros, sees the purchase as a form of retirement savings and made sure the size and terms of the loan would allow her to continue handling expenses such as car repairs and vacations in Egypt.

“We’re not trying to turn a profit with this,” Kuekelheim said. “What matters is that we’ll have a roof over our heads.”