Due to inflation and rising interest rates, interest in mortgages in Germany has fallen sharply. Home loans are at their lowest level in eight years, and new construction is falling. For many people in Germany, the dream of owning their own home is getting further and further away.

According to new data from consulting company Barkow Consulting, published in German media, German banks fell by 28% in September compared to the same month last year.

At €16.1 billion, new business is at its lowest level since 2014. The analysis is based on data from the European Central Bank (ECB) and the German Federal Bank (Bundesbank). New business reported included extensions and revisions to existing financing, as well as first loans.

Dual reluctance – consumers and banks

According to Barkow Consulting, this is a record low and the downward trend is accelerating. In recent months, the number of new mortgage loans has decreased due to rising interest rates. Since the beginning of the year, interest rates on ten-year mortgages have more than quadrupled to about 4%.

Increases in monthly rates often reach hundreds of euros. “There has never been such an increase in interest rates,” said consultant Peter Barkov.

In a survey by the news agency dpa, credit intermediaries reported increased caution among consumers. “With interest rates rising, many people have recalculated, compromised on real estate or put off buying real estate for the time being,” says broker Interhyp.

“Market demand is currently declining across all channels,” said Michael Neumann, CEO of financial company Dr. Klein. Hüttig & Rompf also “observes clear uncertainty among consumers and those interested in real estate.”

In addition, due to high inflation, banks are more strictly checking applications for real estate loans – for example, they calculate a higher cost of living for consumers. “When a bank receives an application, it studies the potential borrower very carefully and considers whether he can afford higher interest and principal in the future,” explained Christina Bannir, Justus-Liebig Professor of Banking and Finance – University of Giessen. She also mentioned the risk of a recession, which could mean job losses and lower incomes.

As if that was not enough, builders are also struggling with the sudden rise in construction prices. Many housing projects have already been canceled.

According to the ifo Institute, 16.7% of surveyed construction companies reported canceling orders in September, which is much higher than in August. Given the difficult times in the housing market, there is much concern about the strategy going forward after years of soaring prices.

Collapse of demand

All this left an impression on the demand for real estate loans. New home loans from German banks to private households hit an all-time high of 32 billion euros in March, but fell in subsequent months to just 18.5 billion euros, according to audit firm PwC in August.

After nearly 20% year-over-year growth in May, new funding has turned negative since June, according to data from Barkow Consulting. In August, the minus compared to the previous year increased to 19%, and in the following month to 28%.

Mortgage lending is a very important business for German banks. Approximately 40% of private real estate loans make up the largest share of their loan portfolio. According to Barkov, after many years of boom, shares in September amounted to 1.555 billion euros. The decrease in mortgage lending worries banks. “Demand is falling day by day. Many projects in the planning stage have been cancelled,” Sparkasse President Helmut Schleweis recently told Handelsblatt.

Bilthouse Group, which unites several credit brokers, can confirm reports of a downward trend. “You used to be able to finance with very little or no equity.” At the moment, some financing requests cannot be transferred to banks “because customers cannot bear the increased interest burden.”

Tighter banking conditions

Bank loans have become much more limited and the proportion of potential buyers who have been turned down has increased significantly, notes Dietmar Rompf, CEO of Hüttig & Rompf. “When the capital ratio is relatively low, banks look particularly closely.”

However, there is hope for loan brokers. Interhype notes that some banks reacted to the increase in interest rates and lowered the minimum repayment requirements. Check24 also reports a slight decline in construction interest rates. In October, they fell to 3.62%. “Property prices are falling again in some regions, for the first time,” says Ingo Fojcik, managing director of construction finance.

The risk of a real estate bubble

According to the study, Frankfurt and Munich are among the cities most at risk of a real estate bubble in the world. With interest rates rising, UBS now expects a “significant price correction”.

Where is the housing market particularly overheated? Which metropolis is most threatened by a soap bubble? The largest Swiss bank UBS investigates and answers these questions in its annual “Global Real Estate Bubble Index”.

In this index, Toronto is now in first place. The Canadian city overtook Frankfurt, which in 2021 was still the city with the highest “bubble risk” in the world. In Germany, according to experts, not only the real estate market in Frankfurt continues to overheat. The metropolis of Bavaria, Munich, ranks fourth in the UBS rating after Zurich.

“Especially investors considering buying in these regions of Germany for yield reasons should be cautious at this time,” advises Maximilian Kunkel, chief investment strategist at UBS in Germany.

For the Swiss bank, Frankfurt and Munich with bubble index values ​​of 2.21 and 1.80 points, respectively, are high-risk cities. According to the Bubble Index, there is a real estate bubble risk of 1.5 points.

UBS defines a housing bubble as a strong and persistent deviation of price levels from certain economic data such as incomes, economic growth and population migration.

It will increase in price by 60% in ten years.

According to UBS, low interest rates over the past decade have steadily decoupled house prices from local incomes and rents. “In the cities most at risk of the bubble, inflation-adjusted prices increased by an average of 60 percent during this period, while real incomes and rents increased by only about 12 percent.

In previous years, UBS had already noticed overheating of the real estate markets in Munich and Frankfurt. However, given the share of income that workers have to spend on a 60 m2 apartment in central areas, Frankfurt and Munich are not in such a bad position. Here, these two cities are significantly inferior to Tokyo, Hong Kong, London and Paris.

Is the real estate boom over?

In Frankfurt, however, UBS is seeing a slight cooling of the market. In the German metropolis, the usual double-digit price increase fell for the first time in a decade, the report said. “Between mid-2021 and mid-2022, house prices rose by only about 5 percentage points.” However, prices for apartments in Frankfurt are more than 60% higher than five years ago.

Munich has the highest “price to rent ratio”. After doubling prices over the past decade, growth here has also fallen to about five percent. “The boom is coming to an end,” Kunkel said of both cities.

Although interest rates have risen rapidly and the economic outlook is cautious, high inflation is reducing the purchasing power of the population. In this context, UBS sees real estate markets at an inflection point and believes that many highly rated cities “are expected to see a significant price correction”.