The real estate market can have a strong impact on the financial system.
(Photo: dpa)
Frankfurt The skyrocketing residential real estate prices in Germany and other European countries call the EU risk monitors to action. The European Systemic Risk Board (ESRB) announced on Friday that letters had been sent to the responsible ministries in Germany and Austria with recommendations on how to contain the price surge.
The risk guards had sent warning letters to Germany in 2019 and Austria in 2016. However, the ESRB explained that the risks had not been sufficiently taken into account. He also issued warnings for Bulgaria, Croatia, Hungary, Lichtenstein and Slovakia.
The dangers differed from country to country, the risk watchdogs said. In some states, these could be addressed through reforms in the housing market and tax policy. Germany created the legal framework in 2017 to introduce borrower-related instruments, such as an upper limit for loans based on the value of real estate. However, none of these instruments were used.
In the meantime, however, the real estate price surge has spread and affects both urban and rural areas. “As a result, existing estimates point to a high and increasing overvaluation of house prices in Germany,” warned the risk watchdog.
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They suggest introducing measures aimed at borrowers. In doing so, they focus primarily on the LTV ratio (“loan to value”), which is important in real estate financing. This reflects the relationship between the amount of the loan and the value of the property. The higher the rate, the greater the risk that the borrower will not be able to service the loan. The German authorities should quickly introduce a legally binding or – if that is not possible – a legally non-binding upper limit for the LTV ratio, the risk watchdogs recommended.
Bafin demands more crisis cushions from banks
Federal Finance Minister Christian Lindner pointed out in a statement that the average LTV ratio has steadily decreased since the outbreak of the pandemic. He also cited the package of measures launched by the financial regulator Bafin in January. The coalition agreement also contains a commitment to create the basis for the introduction of income-related instruments. Necessary legislative initiatives would start in the coming months, it said in his statement at the end of January.
In Germany, the financial regulator BaFin recently raised the so-called anti-cyclical capital buffer from zero to 0.75 percent. Banks must therefore form larger crisis cushions again. In addition, a special systemic risk buffer for real estate loans of two percent is to be introduced. The supervisors also warned banks and insurers to be particularly careful when lending. Financing with a high LTV should be treated restrictively. Borrowers should be able to meet their interest and principal payments at all times.
Some of these steps are also in line with the recommendations of the ESRB. In addition to introducing an upper limit for the LTV ratio, this also proposes requiring banks to have more crisis cushions. This also includes the creation of a system risk buffer.
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