With prices in the German housing market still rising rapidly, the risk of a bubble forming is growing greater by the day, making things more precarious for people who take out mortgages in Germany, and the banks that lend them the money. The Bundesbank is therefore considering various measures to contain the risk on the market.
German banks might set upper limits on LTV ratios
“If further excessive risks build-up, we reserve the right to adjust the buffers or to use other instruments instead,” said Bundesbank board member Joachim Wuermeling to Handelsblatt. According to Wuermerling, this could involve setting an upper limit on the LTV ratio (loan to value ratio).
An LTV ratio reflects the relationship between the value of the property and the amount of money being borrowed. It is calculated by dividing the value of the loan by the value of the property. The higher the value, the riskier the loan is for the bank.
“Against the background of sharply rising prices, housing construction loans have simply become more risky,” said Wuermeling, adding that people buying houses in Germany are taking on more and more debt. “They finance an ever-increasing proportion of their acquisition costs through loans and bring less and less equity with them,” he said. Recent data shows that the loan value now exceeds the property purchase price in nearly 10 percent of sales.