Mortgage regulation

Home ownership must not be consigned to the past

For many people, owning their own property has long been part of their retirement provision. There are many ways in which insurers can contribute to that: life insurance, Riester products, term life insurance – or as a mortgage provider. Plans to tighten up the regulation of mortgage loans thus impact our sector. A sense of proportion is required. The column of Jörg von Fürstenwerth, Chairman of the GDV Executive Board.

The “Süddeutsche Zeitung” made grim reading last week for anyone who may be considering buying a property. The title translates into English as: The pipe dream of home ownership. Germans still preferred to rent in spite of low interest rates, which, the author says, will have “fatal consequences” for retirement provision and social justice. The reason for this persistent renting is the steep rise in property prices plus rising ancillary costs. Not even the rock-bottom interest rates can counter that.

Having the opportunity to own your own home is part of a balanced pension policy
The media report stories like this almost every day. As insurers, we are also concerned about this trend. Property ownership has traditionally been a component of many people’s pension provision. Having the realistic prospect of owning your own home is part of a balanced pension policy – especially for those on an average income.

Moreover, our concern is well-founded as the insurance sector can help people fulfil the dream of owning their own home and provide support through, for example, life insurance, Riester products, term life insurance – and as mortgage providers. In 2015, insurers committed in the region of EUR 8.9 billion to their clients to purchase property, an increase of 41% from 2014.

State intervention must always proceed in moderation
Current plans to tighten up the regulation of mortgage loans thus impact, inter alia, our sector. Market intervention should always proceed in moderation and I think that applies particularly to the property market. Extreme caution is the byword here and intervention should be contingent on a detailed analysis of the overall economic situation plus input from all market participants, including insurers.

What is the issue? The Federal Financial Supervisory Authority (BaFin), according to a draft law by the Federal Government, is to receive extensive intervention rights to limit the volume of new loans, thus nipping any potential property bubbles in the bud. Of course that is understandable if you think back to the financial market crisis in 2008, which was mainly due to the lax credit conditions in the US property market. Ireland, the United Kingdom and Spain also suffered economic problems from a property crash.

However, the regime in Germany is nothing like those countries: we normally require relatively high equity-to-asset ratios when financing the purchase of property. We also offer long-term financing at fixed interest rates, which provides consumers with stability and predictability. Moreover, Germany has nowhere near as many homeowners as those other countries. We have roughly the same amount of tenants as owners. That’s why short-term interest rate increases would not be anything like as harmful to the German property market as they were in the US ten years ago. Moreover, lending standards were raised again last year even though granting credit is a very conservatively managed business in Germany, unlike other countries.

Nonetheless, it’s positive to see that the draft legislation is responding to another problem: many young families and older people had trouble last year acquiring a mortgage or a loan to make their property age-appropriate due to the implementation into German law of the European Directive on credit agreements for the purchase of property. The formulation of the law caused uncertainty among mortgage providers, which prevented them from approving loans. The current draft law takes more account of property values rising due to renovation and construction work when assessing creditworthiness. That sends an important signal.

Life insurers fill a valuable niche
With a 3.6% market share in new loans, life insurers only account for a small part of the mortgage loan market. However, life insurers do fill a valuable niche: unlike banks they can also grant long-term loans in excess of 10 or even 15 years. The reason for that is credit institutions tend to refinance via short-term deposits like current accounts, term deposits or Pfandbriefe (covered bonds), whereas life insurers can invest their customers’ contributions over the long term.
A cautious approach to regulation benefits everyone: customers receive long-term financing under fixed conditions – and insurers an attractive investment when interest rates are low.

Jörg von Fürstenwerth

Jörg von Fürstenwerth