(8)

The ESRB’s assessment of vulnerabilities highlights the following in relation to Germany: a. Most of the residential real estate price indicators available indicate that house prices are overvalued in Germany. Similar to previous estimates made for 2016 and 2017, existing estimates for 2018 point to a significant overvaluation of house prices in urban areas. Following a period of gradual increases since 2010, nominal house price growth has accelerated in recent years, slightly outpacing the growth in household income. Furthermore, this growth has become more widespread in both urban and rural areas. House price increases in the large cities and urban areas reflect a shortage of housing supply relative to demand, and the German Federal Government has introduced a number of measures aimed at alleviating this shortage. Future movements in house prices are, therefore, likely to depend on the effects of these measures. b. Despite a recent pick-up in new lending, the annual growth in housing credit has been moderate over the past three years. A comprehensive analysis of lending standards is currently hindered by the lack of detailed data on loan-to-value (LTV) ratios and on other credit ratios for newly granted loans. However, there is some evidence indicating that the demand for loans with high sustainable (12) LTV ratios has increased. Moreover, the ECB’s euro area bank lending survey further suggests that in 2018 the surveyed banks have decreased their margins on loans for house purchases. c. Household indebtedness can be considered moderate when compared with that in other Member States. However, even though the home ownership rate in Germany is the lowest in the European Union, the share of home owners with a mortgage represents around a quarter of the total population, which is close to the EU average. Although the growth in housing loans has been relatively moderate in the past, the increase in house prices is notable and could at some point be accompanied by a strong increase in newly granted housing loans. This could lead to further growth in overall household indebtedness over the medium-term. d. Adverse economic and financial developments may trigger or be triggered by sharp adjustments in the residential real estate market that could, in the context of cyclical vulnerabilities, lead to the materialisation of direct and indirect risks to financial stability, given the vulnerabilities mentioned above. Potential direct risks to the banking system in Germany relate both to possible defaults of loans granted in an environment of a long-lasting economic upswing and overvalued and strongly increasing house prices, and to competitive pressures that might lead to a loosening of credit standards and reductions in margins for new loans. Moreover, some households may experience a negative wealth effect or fall into negative equity if the decrease in house prices is significant. If, for example, unemployment increases and/or household income growth decreases, some households may find it more difficult to service their debts. The associated negative household income and wealth effects may reinforce the initial shock if households are required to reduce consumption in order to service their debt. This could lead to second-round effects and an increase in risks to credit institutions and the financial system. e. However, it is noted that the long periods over which mortgage interest rates are fixed serve to mitigate the risk posed by increasing interest rates for borrowers. Given the positive income prospects for private households and the persistent favourable labour market conditions, potential risks from households having to stretch themselves financially appear to be rather low. It should be noted, however, that the interest rate risk from the long rate fixation periods lies with the credit institutions and this is one of the cyclical vulnerabilities of the banking system. f. The ESRB takes note of the fact that the Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority – BaFin) has announced that the Ausschuss für Finanzstabilität (the Financial Stability Committee) recommended the activation of a countercyclical capital buffer rate of 0,25 % in order to build up the resilience of institutions in a preventive manner. BaFin intends to activate the countercyclical capital buffer in the recommended manner. The recommended calibration has taken into account the credit dynamics in Germany, which are accompanied by strong residential property price dynamics. However, it is not expected to curb housing credit growth or halt a potential deterioration in lending standards. The national authorities have been monitoring credit conditions, but there has been no formal guidance from them on what prudent standards should include. g. The current policy measures are assessed to be partially appropriate and partially sufficient to mitigate the identified systemic risks related to vulnerabilities in the residential real estate sector. Germany could activate further capital-based measures requiring credit institutions to create additional capital buffers to increase the resilience of the banking system to cyclical risks and vulnerabilities (i.e. credit risk and interest rate risk) that might have accumulated, given the long-lasting economic upswing and also the rapidly evolving housing price dynamics. In view of the significant house price overvaluation in the urban areas of Germany that has already existed for several years, as well as uncertainty regarding lending standards, Germany could contribute to ensuring sound lending standards in relation to new loans in an appropriate manner (e.g. through a recommendation or activation of legally binding limits to LTV ratios, if the legal conditions for activation are met), in order to prevent a build-up of vulnerabilities, thereby fostering financial stability. h. As already proposed by the Ausschuss für Finanzstabilität in 2015 (13), it is also important that national authorities have all necessary macroprudential instruments at their disposal to provide them with the necessary powers to address potential financial stability vulnerabilities, including, in particular, powers to set legally binding limits to loan-to-value ratios – and to either debt-to-income ratios, or debt-service-to-income ratios, in combination with maturity limits – where necessary in relation to new housing loans. Currently, the income-based instruments are, however, not available in Germany. Although the national authorities do have the power to set legally binding loan-to-value limits if deemed necessary to guarantee financial stability, this is conditional on the identification of risks to financial stability stemming from a strong increase in house prices and mortgage lending accompanied by a substantial loosening of lending standards. The current data gaps with regard to lending standards for new mortgage loans should therefore also be closed, so as to improve the ability to identify those risks and to address them when needed – such an initiative is a necessary addition to the German macroprudential monitoring framework.