Potential Effects of the new amendment to the laws governing financial services supervision on the German real estate market

Abstract

The German real estate market has been growing ever since the 2007-2008 financial crisis. Even though prices in the major cities have been growing at a more accelerated rate, the growth is still visible throughout the entire country. The main price driver are an ever-growing demand and low interest rates. Even though the rising prices have been fundamentally justified and there is no speculative behaviour or expansionary credit growth evident in the market, authorities are still worried about the development of a bubble and the consequences it would have. The committee on financial stability advised the implementation of macro-prudential instruments in order to protect the financial stability of the country. They intended to prevent what happened in the United States from happening in Germany. With this consultation, the German Federal Financial Supervisory Authority was granted the ability to intervene and change the framework of real estate loans. With instruments such loan-to-value caps, debt-to income caps, debt-sustainability ratios and amortization requirements, they are supposed to stabilise the real estate market and prevent it from becoming a threat to the financial stability of Germany in the future. Many countries before have used such instruments to reach the same goal. Drawing from experiences they made, one could determine the potential impacts they may have on the German real estate market.