There is no shortage of explanations for the resilience of the German economy: its companies are strong; its political and social institutions stable; and the skills of its engineers legendary. There might, however, be another explanation: its approach to housing. The country’s property market differs widely from those in the rest of the world – and particularly from those of most Anglo-Saxon countries.
The International Monetary Fund pointed out this month that housing can do a lot of damage. An increase in prices provides an initial spur to the wider economy: construction activity is boosted and homeowners grow richer. But as a boom continues, leverage grows and price rises become unsustainable. The bursting of a bubble devastates bank balance sheets and leaves behind an economy that must painfully reallocate productive resources from a bloated construction industry to other sectors.
The IMF said that more than two-thirds of the recent systemic banking crises were preceded by boom-bust patterns in property markets. They triggered the biggest financial crisis in living memory, ruined Ireland and Spain, may soon wreak havoc on China and have put central London out of reach of the middle class, which is priced out of the market. Mortgages are, to adapt investor Warren Buffett’s quip about derivatives, the true financial weapon of mass destruction.
Some countries seem to be more prone to housing excesses than others. The IMF calculates that prices in the UK are 27 per cent above their long-run average relative to incomes, while in Germany they are 16 per cent below. What explains this important difference?
One reason is that living in a home you actually own is not as important as it is in the US or the UK. OECD data show the rate of home ownership is 41 per cent in Germany compared with 71 per cent in the UK and 69 per cent in the US.
This is partly a result of history. Germany needed to build homes after the second world war, during which many cities were destroyed. Supported by generous government subsidies, public, co-operative and private developers built millions of rental units in just a few years. The rental market is highly regulated, and tenants are protected by a body of laws. Most contracts are indefinite, for instance, and as long as rent is paid on time it is almost impossible for a landlord to terminate them. This means renting is a relatively comfortable option.
Mortgage finance also matters. Property loans are generally not as easily available in Germany as in other countries. Lenders typically demand at least a 20-40 per cent deposit. The interest rate is usually fixed for at least 10 years, and even 30-year fixed-rate contracts are on offer. In the case of an early termination of a contract by the borrower, banks can charge a penalty in order to recoup forgone interest payments.
This makes mortgage refinancing – a common reaction to reduced interest rates in the US and the UK – virtually impossible in Germany. It is also uncommon for consumers to borrow against the rising value of their home. As a consequence, interest rate cuts take much longer to feed through the system and are less likely to result in a housing boom. In fact, while prices have risen significantly in urban areas such as Berlin and Munich, there are few signs that leverage has reached a dangerous level.
Despite ultra-low rates, the volume of housing loans to private households grew by a mere 2 per cent in 2013 according to the Bundesbank. With the exception of a shortlived uplift in the east of the country, which was related to reunification, there has been no big nationwide property boom in Germany’s postwar history.
This has implications for the European Central Bank. In Anglo-Saxon countries, the housing market is an important transmission channel for monetary policy. A cut in interest rates by the central bank drives up prices and lowers the cost of serving mortgage debt, which spurs consumption. But if many borrowers cannot use lower market interest rates and a majority of the population rents, monetary policy is less effective.
Those arguing that more spending by Germans is what the eurozone needs to support economic rebalancing should prepare to be disappointed.
The writer is the economics correspondent of Die Zeit