The Stability of the German Housing Market
The last decade has been marked by cycles of excessive boom and bust in the housing market. However, not all countries have experienced high volatility in their house prices. Indeed, Germany has been unique in retaining flat price levels over the whole period and failing to respond to any of the macroeconomic shocks. The main reason for this stability can be found in real estate finance and in the existence of a sophisticated rental market. While in other countries monetary stimuli are effectively transmitted to the real economy via the housing market, the German insistence on prudential lending isolates the housing market from financial market distortions. By demanding high deposits, aligning lending to the mortgage lending value instead of the market value and by offering predominantly fixed-rate mortgages, banks reduce the risk of defaults and thus contribute to stability in the market. This system has evolved as a result not of regulations but of a sophisticated rental market which enables households to save their own funds for house purchases. This, in turn, explains the preference for fixed-rate mortgages.
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