The German housing market and housing finance system Mark Weinrich Association of Private Bausparkassen Berlin, 26th September 2016 1
House price development in Germany German housing market characterised by stability: - Lowest volatility of house prices in all OECD countries (1970 to 2012) - Smooth growth path of nominal house prices Standard deviation of real house prices (1970-2012) Nominal residential property prices Spain UK Ireland Sweden France Finland Switzerl. Italy Germany 2
Major factors for stability of German market - An almost equal share of owner-occupied and rental housing - A risk-mitigating housing finance system - A cautious housing policy 3
Balance between owner-occupied and rental property Housing shortage after WWII fought by promoting rental housing High quality standard secured popular acceptance of approach Many types of rental housing available on market Tenancy law balances the interests of tenants and landlords How does the rental market contribute to stability? - Functioning rental market reduces push towards home ownership 4
Risk mitigating housing finance system Market for housing finance conservative, cautious and long-term in nature: Buyers usually put down a considerable down payment Almost all loans are annuity loans with fixed interest rate and a duration of at least 10 years Thorough credit worthiness assessment How does a risk-mitigating housing finance system contribute to stability? - Reduced risk for borrowers and lenders - Very low default rates - Dampening effect on house price volatility 5
Risk mitigating housing finance system Average interest rates for loans with credit period of 10 and 20 years House price index Germany (2003 = 100) Credit period 10 years Credit period 20 years All properties Residential Commercial 6
Risk mitigating housing finance system Average redemption rate July 15 April 16 May 16 June 16 July 16 Average loan amount Average maturity Average LTV Type of loan Annuity loan Subsidised annuity loan Forward annuity loan Variable loan 7
Cautious housing policy Government tries to control the market with regulatory instruments only: Lowest level of direct and indirect housing subsidies of OECD countries Instruments have almost no distortive effect on tenure choice Instruments do not have a regressive effect Property speculation tax (rental properties) However, taxation regime for rental properties favours wealthier landlords How does a cautious housing policy contribute to stability? - Distortive effects on market reduced - Lower risk of over-investment in real estate 8
Discussion: home ownership in Germany Home ownership rate in Germany 45.7%: Not an indicator for inefficiencies in housing & housing finance market Historical legacy a major reason: - Large part of housing stock destroyed in WWII - Former socialist part of Germany with very low homeownership rate Attractive rental market Estimate for home ownership potential in Germany is 65% 9
Conclusion - A housing finance system which values stability and safety does not constitute an obstacle to a moderately high rate of home ownership. On the contrary, it dampens price volatility in the real estate market which improves the affordability of home ownership. - A lively rental market which is not preoccupied with stigma has an important buffer function. It dampens the urge to enter home ownership and offers in particular but not only, young, mobile and/or low-income households a safe tenure alternative. - High direct or indirect subsidies are not necessary in order to have an efficient real estate market. On the contrary, many policies distort the market significantly, are highly regressive and increase the volatility of prices of real estate. Regulatory instruments may be the better choice. 10