Real Estate Lending

Germany’s Risky Mortgage Boom

  • Why it matters

    Why it matters

    A mortgage boom in the US led to the 2008/2009 global financial crisis, which is why financial watchdogs are keeping a close eye on property markets, even in stability-conscious Germany, where house prices and mortgages are rising fast.

  • Facts


    • German real estate lending reached €235 billion in 2016, up a quarter from 2009, according to research for Handelsblatt by Barkow Consulting.
    • Bundesbank board member Andreas Dombret told Handelsblatt that banks were now more willing to take risks, but Germany’s booming real estate market was not yet a bubble.
    • Banks are increasingly borrowing short and lending long to boost net interest income. But if interest rates rise, the strategy could turn problematic.
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Is a bubble brewing?

Germany’s banks are cashing in on the real estate boom by ramping up their mortgage lending at growth rates not seen in many years, according to research by Barkow Consulting, commissioned by Handelsblatt.

Real estate lending reached €235 billion, or $266 billion, in 2016, up a quarter from 2009, the Barkow study showed. The loan portfolio in bank balance sheets has been growing at annual rates of almost 4 percent in recent years.

“Those are high growth rates by German standards even if they’re not nearly as high as in some countries before the financial crisis,” said Peter Barkow, founder of Barkow Consulting. The last real estate boom in Germany was back in the early 1990s, following unification.

“The situation in Germany is not yet a bubble. But I’m a little worried in my role as banking supervisor.”

Andreas Dombret, board member, Bundesbank

Banking regulators aren’t sounding the alarm yet, but they’re becoming uneasy about the lending growth. They include Andreas Dombret, a member of the board of the Bundesbank, Germany’s central bank.

“There are markets in the euro zone that could be at risk of overheating,” Mr. Dombret, responsible for banks and financial market supervision at the Bundesbank, told Handelsblatt in an interview. “But we don’t see that for the euro currency zone as a whole. I wouldn’t call the situation in Germany a bubble yet. But I’m a little worried in my role as banking supervisor.”

He said there were three reasons for this. Price increases in big and medium-sized cities are inflated; banks and savings banks are lending more due to low-interest rates; and those banks are more willing to take risks.

Mortgage interest rates have been falling for the past 8 years and loan maturities have been lengthening, which makes sense for borrowers because it locks in low interest rates for longer.

The proportion of new mortgages running for more than 10 years has increased to 40 percent, from around 25 percent in 2009. Data from mortgage broker Interhyp show that average maturity has increased to 13 years, up one year compared with 2010.

The problem is that this can lead banks into temptation. At present, they’re making money by borrowing money on shorter timeframes to finance longer-term mortgage lending, and pocketing the difference between lower short-term interest rates they pay and the higher long-term rates they receive.

The strategy is called maturity transformation, but it poses risks because if interest rates increase, banks will have to pay more for their own borrowing before they can increase their income from longer loans.

Savings banks and cooperative banks in particular are “trying to stabilize their net interest income by expanding maturity transformation,” said the German finance ministry’s committee on financial stability, which is made up of officials from the ministry, the Bundesbank, and the Federal Financial Supervisory Authority, known by its German acronym Bafin. “In doing so they are taking on additional interest rate and liquidity risks.”

The risks are being kept at acceptable levels within the individual banks, but the committee is worried about a lemming effect. “The majority of these banks are exposing themselves to risks that all go in the same direction,” said the committee.

In its 2016 annual report, Bafin warned that well over 50 percent of all German banks were subject to rising interest rate risks, and that the trend was increasing.

Banking supervisors have responded by forcing banks to set aside reserves for their interest rate risks, a measure that took effect at the start of this year. The country’s approximately 1,000 cooperative banks are required to set aside a cushion totaling €5.9 billion, said the National Association of German Cooperative Banks.

It’s a similar amount for the 400 savings banks, said sources close to their association.

Supervisors have recently been given greater powers to curb risks resulting from real estate booms, such as setting minimum levels for down-payments on home purchases and dictating how quickly mortgages must be repaid.

The committee on financial stability, set up in 2013 to help prevent a repeat of the financial crisis, had proposed these measures back in 2015, as well as other controls that were not adopted, such as imposing upper limits on mortgages based on the borrower’s income.

In its 2016 annual report, Bafin warned that well over half of German banks were subject to rising interest rate risks.

“The watering down of the original proposals has cast doubt on the effectiveness of the new instruments,” warned professor Isabel Schnabel, a member of the government’s panel of economic advisers.

Many borrowers don’t make any down-payments on mortgages. The Association of German Pfandbrief Banks estimated that around 12 percent of mortgages in 2015 took the form of 100 percent loans. But the association doesn’t seem alarmed. “We haven’t seen that loan customers are financing a higher proportion of their property purchase through borrowing,” said Achim Reif, an expert on property finance at the association.

He predicted that rules forcing banks to make more creditworthiness checks would prove effective. “Many banks aren’t just checking if a borrower can afford a loan at current interest rates but also if capital servicing, meaning interest and principal payments, would amount to 5 or 6 percent,” he said.


Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. To contact the authors:,

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