Playing it Safe

German politicians have criticized the US for failing to implement stringent controls on financial markets with many pointing out that the sub-prime mortgage crisis that felled Wall Street’s venerable financial institutions week could not happen in Germany. They may have a point.

For one, experts say, the type of high risk lending practices that were exposed when the bubble burst in the US housing market a few years ago is more heavily regulated in Germany.

“The sub-prime market is virtually non-existent,” said Elaine Kempson, director of the Personal Finance Research Centre at the University of Bristol.

Home ownership rates in Germany are also among the lowest in Europe -- under 50 percent compared to around 70 percent in the US and the UK, said Kempson, whose institute has done comparative studies in Europe on personal credit risk and indebtedness.

“Germans are much more conservative than Americans and other Europeans in terms of how much debt they are willing to take on,” she said.

Larger down payments

Banks in Germany also tend to have more stringent criteria in determining the creditworthiness of borrowers than their European or American counterparts.

“There is no such thing as zero financing on a home,” said Thomas Beyerle, head of research at the DEGI, a Frankfurt-based property investment company. In Germany, homeowners are required to make a down payment of at least 20 percent of the purchase price of a house to obtain a mortgage in the first place.

Michaela Roth, spokesman of the German Federation of Savings and Loan Banks (DSGV) said it is not unusual to put down as much as 40 percent equity and finance the rest.

“Germans generally are only prepared to be moderately indebted,” she said. Even big ticket purchases such as a washing machine are paid for with hard cash or bank debit cards, with only five percent of consumers even bothering to use a credit card.

Mind-set averse to debt

Some say German financial prudence has its roots in the world wars, a period marked by acute economic hardship and suffering.

“The puritanical ethic of the war generation is still very much ingrained in Germany today,” said Fabian Christandl, a researcher at the Institute for Economic and Social Psychology at the University of Cologne.

Germans work hard, put their cash in a savings account, earn a bit of interest and only take on debt for big investments, said Christandl.

“A house is one of the very few purchases for which it’s viewed as acceptable to go into debt,” he said.

And homeowners who possess enough capital to invest in residential property beyond their own four walls are not interested in flipping over properties for quick profits either, said Beyerle. Real estate investments are viewed either as a source of steady rental income or a way to reduce one’s tax burden.

Bubble burst only once

Beyerle explained that after German reunification in the 1990s, the government provided tax incentives for investors to buy up and develop real estate in the former East German states, but when the scheme ended ten years ago, the housing market collapsed from properties that wound up being overvalued.

“This was the only time that the bubble burst in Germany,” said Beyerle.

Since property values in the rest of Germany have remained fairly steady, even in prime locations near major urban centers such as Munich, Frankfurt, Stuttgart, Hamburg or Cologne, speculation fever never caught on in Germany, he added.

“The US housing market was based on the premise that home values had no where to go but up and would keep rising very rapidly. Then when it got bad, the whole pack of cards crumbled,” said Kempson. She cited a World Bank report which indicated that as much as 20 percent of all mortgages in the US are in the sub-prime category.

Loans without income verification in US

In the UK, five percent of the mortgage market is sub-prime, but those with impaired credit histories might be marginal bank risks, such as students or those who have a perspective of future employment that would enable them to pay back their bank loans.

Not so in the US, where unlicensed mortgage brokers targeted low income groups who never would have been able to borrow from more conventional banks, said Kempson.

“These brokers were aggressively selling “discounted” packages to those surviving on social security,” she said. Kempson added that as much as 40 percent of the loans were made without any income verification, which is much less likely to happen in Europe.

Following a short period of loans made at fixed low rates, borrowers with “sub-prime bargains” found their mortgages being reset at double-digit rates. Then when soaring US housing prices started to plunge, borrowers were saddled with sub-prime mortgages that exceeded the value of their homes and couldn’t refinance their way out of debt, said Kempson.

A nation of renters

Achim Duebel, a mortgage sector expert based in Berlin, said the problem with sub-prime mortgages doesn’t exist in Germany since it is largely a nation of renters.

“Every sub-prime borrower here is a renter”, he said. But Duebel added that younger Germans are looking at more innovative ways to invest in property.

“The mortgage market is not as dull and boring as it looks in Germany,” he said, explaining that most Germans still take out traditional mortgages at their local bank, but there is a growing number of marginal, but not sub-prime borrowers -- those with no capital, but strong cash flow, such as the self-employed or freelancers, who can find mortgage brokers offering packages that require little or even no financing.

“There is cutthroat competition out there, a younger generation that wants to shop for the best rates, the best deals, so this is giving the entire mortgage market a push,” said Duebel.