Banks feel the slump in the real estate market

Frankfurt The slump in the residential real estate market is leaving its mark on the balance sheets of banks and savings banks. The bottom line is that the portfolio of mortgage lending grew between October and December 2022. But the growth rate has roughly halved.

This is shown by a data analysis by the analysis company Barkow Consulting, which is available to the Handelsblatt. The portfolio of construction financing for private customers grew by only 0.8 percent in the fourth quarter of 2022 – after 1.5 percent in the third quarter of 2022 and 1.7 percent in the fourth quarter of the previous year.

Since the summer of 2022, banks have been reporting sharp declines in new mortgage lending. However, this is only gradually having an impact on the loan portfolio. Because banks usually do not pay out these loans in full when buying a new property, but gradually as construction progresses.

In January, the building finance portfolio of German financial institutions could even have shrunk again for the first time in seven years. “On the one hand, the market development is generally weak at the moment, on the other hand, January is traditionally the weakest month in construction financing,” explains Peter Barkow, Managing Director and founder of Barkow Consulting.

Commerzbank’s forecast is similar: “The volume in construction financing increased slightly overall in the fourth quarter, but new business continued to fall,” reported CFO Bettina Orlopp last week when the institute’s annual balance sheet was presented. “If there is no trend reversal here, our loan book will start to shrink in the current year.”

Mortgage financing plays an important role in the lending business

The development affects the earning potential of the banks: on the one hand, the construction financing business is currently more profitable than in previous years because banks and savings banks can now earn more on individual loans due to higher interest rates. But if the loan portfolio should shrink, the institutes only earn the higher interest margin on a smaller loan volume.

Real estate loans are of great importance for German financial institutions, as they account for the largest share of the institute’s total loan portfolio. According to Barkow, their share was 43.1 percent, followed by corporate loans with 36.7 percent.

The emerging weak growth is currently hitting the savings banks particularly hard. The public institutions had complained more than other banking groups about the slump in new mortgage lending business. In fact, their home loan portfolio only grew by 0.6 percent or EUR 2.2 billion in the fourth quarter.

“Growth at the savings banks has slowed down more than was the case with other banking groups,” says Barkow. This is because the credit growth of the savings banks is below the market average of 0.8 percent. In absolute figures, credit growth was even below that of the Volks- und Raiffeisenbanken, whose loan volume rose by three billion euros or 0.9 percent.

“This indicates that the business policy pursued by the savings banks was partly responsible for the slump in new business. Apparently, the savings banks were particularly cautious,” explains Barkow.

Growth at the savings banks has slowed down more than other banking groups. Peter Barkow, Barkow Consulting

Bundesbank data show that it has become more difficult overall for bank customers to obtain real estate loans over the past year. The financial sector has continuously tightened its lending criteria since spring – and intends to tighten them even further in the first quarter.

This means that the financial institutions check more strictly whether they grant a customer a loan at all. This is the result of the Bundesbank’s “Bank Lending Survey”, for which the central bank asks a little more than 30 banks about their business policy in corporate, construction financing and consumer loans every quarter.

The proportion of banks that refuse loan requests outright has skyrocketed over the same period. In the case of private real estate financing, the rejection rate has risen even more significantly than in the case of corporate loans.

Bundesbank expects further decline

In Germany, banks and savings banks have tightened their lending guidelines more than banks in other European countries. The Bundesbank attributes this to the fact that the real estate boom was also more pronounced in Germany beforehand.

graphic

The stricter credit guidelines were accompanied by higher interest rates for customers, as the bank survey and market data show. Not only has the general interest rate risen due to the interest rate hikes by the European Central Bank (ECB), the financial institutions have also increased their interest margins significantly, meaning they earn more on the loans.

According to the Bundesbank survey, the less favorable conditions for customers are the most important reason, alongside the more uncertain macroeconomic outlook, for the sharp drop in demand for home loans.

In fact, in the fourth quarter, demand for home loans plummeted more than at any time since 2003, when the Bundesbank began collecting this data. The Ifo Institute reported on Friday an unusually high level of cancellations in housing projects.

The decline in lending in the housing market is likely to continue for a while. Jens Ulbrich, chief economist at the Bundesbank

This drop in demand should gradually have an impact on the development of real estate prices. From the middle of last year, the price dynamics in Germany “settled noticeably”, said the chief economist at the Bundesbank, Jens Ulbrich. “In this respect, we also expect for this year that the price dynamics on the real estate market will not continue in the way we have seen in recent years.” However, according to the financing consultant Europace, new building prices surprisingly rose again in January.

However, it is unlikely that this development will lead to a revival of the mortgage lending market in the short term. “The decline in lending on the residential real estate market is likely to continue for a while,” said Bundesbank chief economist Ulbrich. “The growth rates and the volume of new business that we have seen in recent years are now likely to remain unmatched for a long time,” agrees data analyst Peter Barkow.

More: “The perfect storm” – Bundesbank expects weakening of private residential construction

source site-11