The German institute Institut der deutschen Wirtschaft, specialized in economic studies, has published a complete paper in which the intrinsic risk of the German real estate market is analyzed.
Like all real estate markets in Northern Europe, the German one has seen an explosion in prices in recent years, especially when the ECB started lowering rates, allowing more citizens to open mortgages and finance what, for many Germans , until yesterday was a dream: in fact, if the Italians were traditionally owners of the house, this did not happen for the Germans. In the following graph you can evaluate the trend of real estate interest – real estate values and volume of real estate loans
The correlation between negative rates, property values and loan volumes is obvious, as well as obvious.
So we have a booming market, growing loans and all of this is driven by negative rates pushed by the ECB. This would already present a risky position, but there is a second element that should increase our perception of imminent danger: in fact, the percentage of loans in which the value of the loan is equal to or exceeds the value of the properties pledged as collateral increases.
The yellow part of the bar indicates the percentage of loans whose value exceeds that of the properties pledged as collateral. Let's see how this has grown over time, and is now the prevailing category. Obviously, this is the result of almost zero-interest loans: with such low interest rates, given that the loan is made, why not also finance the furniture and, perhaps, the new car, perhaps electric?
Unfortunately, this idyllic picture is about to end. Indeed:
- the ECB will first terminate QE then, if it fails to tame inflation, it will touch interest;
- disposable income for Germans, as for all Europeans, is falling due to the explosion in energy prices for households. This will put the payment of the loan installments at risk, especially for the most indebted situations.
All this takes us back to 2007 in the USA, when a rise in rates at a time of stagnant incomes sent the American real estate market into crisis, triggering the subprime mortgage crisis and therefore of the entire American financial system. Except that at the time, for better or for worse, the Fed and the government intervened massively. Can you imagine the German government throwing away a few tens or hundreds of billions to save the market and financial institutions? A financial crisis that originated in the German real estate sector would therefore have a great chance of spreading elsewhere, such as the Netherlands, where private debts are a very important component of the country's overall debt. There would be a risk of a real default for private debt.
Are we ready for such a thing?
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/germania-si-rischia-una-crisi-immobiliare-come-nel-2007-la-bce-deve-stare-attenta/ on Sun, 17 Apr 2022 09:16:59 +0000.