vdp-Spotlight: Low interest rates keep home ownership affordable

Despite rising property prices, home ownership remains affordable thanks to the continuing low interest rate environment. This is the finding of a recent study on the development of home buyer financing which is regularly conducted among member institutions of the Association of German Pfandbrief Banks (vdp) and published as part of the “vdp Spotlight” series.

The cost of purchasing or building owner-occupied housing rose by around 11% between 2017 and 2019, thus at a faster rate than borrowers’ disposable income (+5%).

“The gap between property price growth and income trends has continued to widen since 2017. Even so, home ownership remains affordable because interest rates are extremely low and will remain so in the long term. In this environment, borrowers can still agree to high initial repayments without taking on too much debt,” explains vdp Chief Executive Jens Tolckmitt.

Debt burden remains moderate

According to the vdp study, the average debt burden – the share of disposable household income that home buyers spend on interest and principal repayments – rose slightly between 2017 and 2019 from 25 to 26%, which remains a moderate level on a long-term comparison. In the same period, the average debt ratio in Germany increased from 79 to 82%. Moreover, fixed-interest rates were agreed over longer periods: in 2019, loan terms were fixed for an average of 15 years, one year longer than in 2017.

“Borrowers and banks remain focused on security”
“Home buyers are currently benefiting from the low interest rate environment, which gives them the opportunity to secure favourable financing terms over an increasingly long period of time. The results of our study show that borrowers and banks remain focused on security in real estate financing,” Tolckmitt adds. “Banks still attach great importance to making sure that borrowers use their equity wisely and have adequate financial capacity.”

According to the study’s author, vdp Department Head Thomas Hofer, the risk-conscious approach is reflected, for example, in the fact that the debt burden ratio and the share of borrowed funds in home-buyer households with comparatively low incomes have not increased in recent years. The average agreed initial repayment is at the same level as for other income groups.