One Year Later, Has the German Bubble Grown?
Now that the Deutsche Bundesbank has officially warned of local bubbles in German housing markets, I find the situation to be even more startling than it was when I wrote about it a year ago in a post for the Enterprising Investor. The confluence of risks is extraordinary: Germany, the financial heart of Europe, is vulnerable to a catastrophic failure of the banking system.
Whoa.
That’s right. If interest rates ever rise materially in Germany, the country would likely experience a US-style S&L crisis, in which short-term funding rates for banks (i.e., deposits) exceed the interest earned on mortgages — many of which are fixed-interest-rate loans.
Moreover, Germany has a law that helps homeowners renegotiate rates after 10 years in a mortgage. Homeowners will only renegotiate their payments downwards, and more savings for homeowners means less cash flow for banks.
This bubble may not end in calamity: It appears that most buyers have substantial skin in the game, with minimum down payments of 20%–30%. And even if I’m right, I can’t accurately predict its timing. There are simply too many ways for the game to be extended or for the country to alter its course, even if it just delays the day of reckoning.
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