The mortgage market was equivalent to 47% of the country’s GDP in 2020, an unusually low level for a developed economy. There was a huge drop from 82.2% of GDP in 1998. During the past period, outstanding home loans totaled 1.57 trillion euros, up 6.5 percent from 2019, according to Deutsche Bundesbank.
Conservative borrowing by Germans is often attributed to the hyperinflation of the 1920s. But changes in tax incentives are likely to better explain the overall decline in the mortgage-to-GDP ratio.
Interest rates on home loans continue to fall
Residential real estate buyers in Germany are mostly borrowing at a fixed rate. Fixed-rate loans (IRFs) with terms of 5 years or more accounted for 82% of total loans in 2020, up from 80.8% in 2019 and well above the 64.4% share in 2009.
In contrast, loans with IRFs of up to 12 months never exceeded 20% of approved new loans and fell to 10.5% of total loans approved in 2020. This interest rate profile of residential real estate in Germany provides considerable stability to the German market, which tends to suffer from sudden fluctuations in home values.
An important explanation for the stability of residential property interest rates in Germany is the loan sources of German banks, which take out long-term loans and therefore tend to grant long-term loans.
According to Deutsche Bundesbank, the average interest rate on new residential real estate loans in Germany in February 2021 was 1.17%, up from 1.28% in 2020 and 1.78% in 2019. During the same period:
IRF under 1 year: 1.73%, up from 1.82% previously.
IRF 1-5 years: 1.28%, down slightly from 1.33% previously.
IRF 5-10 years: 1.04%, down from 1.13% in 2020.
IRF over 10 years: 1.14%, down from 1.26% previously.
Residential real estate interest rates in Germany have been declining since late 2008 following the ECB rate cuts. Since March 2016, the ECB prime rate is 0%.