vdp Survey: Germans continue to put safety first in their financing of residential property

• High amortization, long interest rate fixation periods – Survey by the Association of German Pfandbrief Banks (vdp) shows that financing structures remain conservative
• Strong demand on the housing market and dynamic rise in property prices fuel borrowing needs; borrowed funds ratio and debt burden ratio see moderate increase

vdp Chief Executive Officer Jens Tolckmitt: “Residential property financing practices in Germany have always been conservative. We are glad to see that this remains true in the current low-interest-rate environment. German borrowers are aware that the general conditions can change, and their main priorities continue to be planning security and quickly repaying the debt on their property.”

In their financing of residential property in Germany, buyers of family houses and freehold apartments continue to put safety first. This is shown by the latest survey of the Association of German Pfandbrief Banks (vdp) conducted among its member banks. Despite the favorable level of interest rates and the rise in borrowing needs resulting from the strong demand in the housing market, the ratios confirm that financing structures remain conservative.

Because of the strong increase in residential property prices paired with incomes that have risen less strongly, borrowers had to invest more in 2017 to own their own home. Whereas buyers needed 6.1 times their annual net income in 2015 to buy their own house, the amount needed in 2017 was 6.3 times that. The corresponding figure for owner-occupied apartments rose somewhat more strongly, from 5.5 times to 6.0 times their income. Since interest rates for loans for house purchase have moved sideways for around two years, it was no longer possible – unlike in the years before – to compensate for the increase in prices through the reduced interest burden. The debt burden ratio, which is to say the portion of household net income that is employed to pay interest and repay principal, has gone up slightly as a result. But at 25 percent in the case of family houses and 24 percent for owner-occupied apartments, it is below the long-term average once again in 2017, too.  

On balance, the data gathered by the vdp do not indicate that buyers’ propensity to take on risk has risen. The average initial amortization rate has increased continuously in recent years and currently stands at 3.23 percent (2015: 3.06 percent). At the same time, borrowers are eager to secure the favorable financing conditions for as long as possible. In terms of the new lending volume, the portion of loans with a fixed interest rate period of more than ten years has climbed to 64 percent compared with 47 percent in 2015. Overall, the average arithmetic total term of the loans stands at around 25 years.

vdp Chief Executive Officer Jens Tolckmitt: “Residential property financing practices in Germany have always been conservative. We are glad to see that this remains true in the current low-interest-rate environment. Amortization and interest rate fixation periods have gone up again, which means that German borrowers are aware that the general conditions can change, and their main priorities continue to be planning security and quickly repaying the debt on their property. This applies in the same measure to the banks providing finance, which are taking care to ensure that financing structures remain appropriate and sustainable in spite of the challenging market setting. What is more, the German Pfandbrief banks have in the Pfandbrief a reliable instrument that allows them to fund their lending activities at matching maturities. The soundness and sustainability of long-term financing in Germany, which is geared to crisis resilience, are demonstrated yet again by our data.”

About the study

In 1984, the Association of German Pfandbrief Banks (vdp) began examining the financing of residential property on a regular basis. The latest “Structures of Residential Property Finance” survey follows on from earlier studies and was conducted among vdp member banks active in this field of business as at mid-2017.
The aim is to obtain, on the basis of recent data, consistent information on property purchase prices and market values as well as on the borrowed funds used and the debt burden borne by borrowers in financing residential property in Germany. The German Pfandbrief banks represent one-third of this market.