Germany Fights Soaring Home Prices With Lending Curbs
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Germany Fights Soaring Home Prices With Lending Curbs

As in the U.S. and other economies, pandemic financial support has sparked a surge in property investment.

By Tom Fairless
Thu, Jan 13, 2022 11:36amGrey Clock 3 min

Frankfurt—Germany’s financial regulator said it would clamp down on mortgage lending, signalling mounting concerns about the risks posed by the nation’s rapidly rising house prices.

Across Germany, house prices have boomed in recent years as some German families overcame their traditional reluctance to own property. The trend has been powered by ultralow borrowing costs from the European Central Bank and low returns on bank deposits, where most Germans stash the bulk of their savings.

Germany’s Federal Financial Supervisory Authority, or BaFin, warned lenders on Wednesday to be conservative in their mortgage lending given the quick rise in prices, and said borrowers should be able to make their monthly mortgage payments even if interest rates rise. It also ordered local banks to hold additional capital against residential mortgages.

“Vulnerabilities to negative economic developments and especially to the residential property market have built up” in Germany’s financial system, the regulator said.

Germany faces a similar predicament to economies around the world, including the U.S., where efforts to support the economy during the pandemic helped spark a surge in property investment. In China, a crackdown on housing speculation amid booming prices is weighing on the nation’s growth prospects.

Housing bubbles have been at the root of many financial crises, including the 2007-08 global financial crisis.

The move to curb access to mortgages amounts to a form of financial-system tightening that targets a specific segment of the economy. The European Central Bank has announced a scaling back of its giant pandemic-era bond-buying programs, but has been less aggressive than the Federal Reserve about raising benchmark interest rates. The Fed is expected to lift rates multiple times this year while the ECB has pledged to keep its deeply negative rates for an extended period.

There is concern that the ECB’s reluctance to raise interest rates is fueling a speculative frenzy among investors in property and other areas. While the ECB oversees monetary policy in the euro area, individual countries have the ability to impose so-called counter cyclical buffers to fine-tune local financial conditions.

German house prices have surged during the pandemic, rising almost 60% above their 2015 levels, according to the federal statistics agency Destatis. Prices jumped by 12% year-over-year in the three months through September, one of the fastest growth rates in Western Europe.

German household debt has also increased sharply, rising to around 58% of gross domestic product in the middle of last year from 53% of GDP in 2019, according to the Bank for International Settlements, a consortium of central banks. That is still lower than the U.S., where household debt was around 79% of GDP last year.

BaFin said it would ask German lenders to set aside a capital buffer worth 2% of the risk-weighted assets on loans secured by residential property, up from zero at present. Banks will also need to set aside 0.75% of the risk-weighted assets on domestic risk positions, also up from zero, it added. The buffers are intended to absorb possible future losses.

The banks will have time to adjust to the new requirements, which take effect early next year, and will preserve around €22 billion, equivalent to $25.02 billion, of core capital in the banking system, BaFin said. Banks will generally be able to meet the new requirements from existing excess capital, although a few institutions will need to raise fresh capital, it said.

The regulator warned that it might issue binding loan restrictions if it judged that lending standards had become too relaxed, including an upper limit for the proportion of debt in residential property financing.

“With these capital buffers, we not only take account of cyclical risks, but also precisely counter the specific financial stability risks on the residential property market, where price and credit growth are currently very strong,” said BaFin President Mark Branson.

German cities were at, or near, the top of an annual real-estate bubble index published by Swiss bank UBS last October, suggesting that property prices there will likely fall in future. Frankfurt topped the list of 25 global cities, while Munich was in fourth place. The most overvalued U.S. city, Miami, was in 12th place.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication January 12, 2022.



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Hong Kong Takes Drastic Action to Avert Property Slump

The city’s real-estate market has been hurt by high interest rates and mainland China’s economic slowdown

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Hong Kong has taken a bold step to ease a real-estate slump, scrapping a series of property taxes in an effort to turn around a market that is often seen as a proxy for the city’s beleaguered economy.

The government has removed longstanding property taxes that were imposed on nonpermanent residents, those buying a second home, or people reselling a property within two years after buying, Financial Secretary Paul Chan said in his annual budget speech on Wednesday.

The move is an attempt to revive a property market that is still one of the most expensive in the world, but that has been badly shaken by social unrest, the fallout of the government’s strict approach to containing Covid-19 and the slowdown of China’s economy . Hong Kong’s high interest rates, which track U.S. rates due to its currency peg,  have increased the pressure .

The decision to ease the tax burden could encourage more buying from people in mainland China, who have been a driving force in Hong Kong’s property market for years. Chinese tycoons, squeezed by problems at home, have  in some cases become forced sellers  of Hong Kong real estate—dealing major damage to the luxury segment.

Hong Kong’s super luxury homes  have lost more than a quarter of their value  since the middle of 2022.

The additional taxes were introduced in a series of announcements starting in 2010, when the government was focused on cooling down soaring home prices that had made Hong Kong one of the world’s least affordable property markets. They are all in the form of stamp duty, a tax imposed on property sales.

“The relevant measures are no longer necessary amidst the current economic and market conditions,” Chan said.

The tax cuts will lead to more buying and support prices in the coming months, said Eddie Kwok, senior director of valuation and advisory services at CBRE Hong Kong, a property consultant. But in the longer term, the market will remain sensitive to the level of interest rates and developers may still need to lower their prices to attract demand thanks to a stockpile of new homes, he said.

Hong Kong’s authorities had already relaxed rules last year to help revive the market, allowing home buyers to pay less upfront when buying certain properties, and cutting by half the taxes for those buying a second property and for home purchases by foreigners. By the end of 2023, the price index for private homes reached a seven-year low, according to Hong Kong’s Rating and Valuation Department.

The city’s monetary authority relaxed mortgage rules further on Wednesday, allowing potential buyers to borrow more for homes valued at around $4 million.

The shares of Hong Kong’s property developers jumped after the announcement, defying a selloff in the wider market. New World Development , Sun Hung Kai Properties and Henderson Land Development were higher in afternoon trading, clawing back some of their losses from a slide in their stock prices this year.

The city’s budget deficit will widen to about $13 billion in the coming fiscal year, which starts on April 1. That is larger than expected, Chan said. Revenues from land sales and leases, an important source of government income, will fall to about $2.5 billion, about $8.4 billion lower than the original estimate and far lower than the previous year, according to Chan.

The sweeping property measures are part of broader plans by Hong Kong’s government to prop up the city amid competition from Singapore and elsewhere. Stringent pandemic controls and anxieties about Beijing’s political crackdown led to  an exodus of local residents and foreigners  from the Asian financial centre.

But tens of thousands of Chinese nationals have arrived in the past year, the result of Hong Kong  rolling out new visa rules aimed at luring talent in 2022.

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