How to invest in real estate despite the residential properties credit directive
Real estate is amongst the most popular investments of Germans. This was shown by a representative survey of the German Securities Service Bank (dwpbank). Accordingly, 24% of respondents plan to invest in property in the future. However the purchase of an investment apartment as pension provision has been hampered since May 2016. The reason for this is the residential properties credit directive, short WIKR, which provides for stricter regulations for the award of loan agreements.
For people with little capital or even for the elderly, it is thereby becoming more difficult to conclude a credit agreement. Even in the real estate industry, the new regulation has been making itself noticeable. Politics are now even discussing whether to tighten the residential properties credit directive further.
Find out what the residential properties credit directive regulates, what the consequences for credit intermediaries and consumers are and how despite everything, it remains possible for small investors to invest in real estate in this article.
Why the German real estate market is so popular
According to a study by the British bank HSBC, Germany next to Greece, Portugal, South Korea and Japan count as the best real estate markets in the world. That the nationwide demand for real estate is higher than ever, is also shown by the price developments in recent years. In German cities, the real estate and land prices have nearly doubled since of 2007. One reason is certainly the development of the annual interest rate on loans, which rushes from record low to record low.
What will the residential properties credit directive change?
Credit intermediary in banks are required by the new legislation to examine whether the applicant can economically afford the loan. For the approval of credit agreements, lenders must now orient themselves less on the property value and a lot more on the performance of the borrower. A credit agreement can therefore only come about if the consumer can repay the full sum within his statistical life expectancy. Banks can expect very high penalties should the credit intermediary not perform the audit sufficiently thoroughly and failure occurs. A statistic of the European Central Bank confirmed that the strict regulation to such an extent only concerns Germany and no other EU member states.
What the 5 consequences of the residential properties credit directive are
The intensified audit of the loan agreements by the credit intermediary attracts numerous consequences.
Consequence 1: Hardly any chance with little own capital
For people with little own equity it becomes difficult to conclude a credit agreement, because lenders are bound by strict regulations. Chances for buying a condominium as pension provision are therefore very low.
Consequence 2: Discrimination of young families and pensioners
The HSBC study shows that young families and people of retirement age are mostly affected by the regulation as they have a lower income and thus are less creditworthy. This almost leads to discrimination against consumers of that age group, as often loans are not even approved for refurbishment measures or arrangements for senior-friendly renovation.
Consequence 3: Sales of condominiums falters
Even the changes in the real estate industry will not go unnoticed. The current BFW survey highlights the fact that approximately 80% of the interviewed representatives of the housing industry perceive the impact of the residential properties credit directive during the sale of their properties. Around 40% of companies already experienced that consumers cancelled a property purchase shortly before the conclusion of contract because the credit agreement with the Bank did not materialize. According to 70% of respondents a decline in mainly the medium price segment is to be recorded. 20% also spoke of a decline in the low price segment. However, entire 61% of real estate companies have confirmed that developed projects can only be sold off hesitantly. As required capital is tied up longer, problems arise therefrom.
Consequence 4: Construction activity is decreasing
From the results of the HSBC study, the assumption can be taken that the sinking in property prices in connection with the stringent residential property credit directive could trigger a chain reaction. Possible consequences would be, for example, a decline in construction activity on German soil. However, these are only speculation so far. The activities from previous years currently still show the opposite. The number of building permits awarded is still increasing from year to year.
Consequence 5: High-income people at an advantage
On the other hand it looks rosy for high income consumers with sufficient available own equity. Credit intermediaries can offer them very advantageous conditions for property finance. The Bankers Association confirmed that it is possible to receive a ten-year mortgage with an annual interest rate of 1.4%.
A representative survey of the German Socio-Economic Panel (SOEP), which was conducted with 12,000 German households, also produces that well-off consumers take advantage of the changes. The results showed that especially the top 20% of income groups benefit of the low interest rates and conclude cheap credit agreements for the financing of real estate. However in other income groups the equity ratio dropped to 17.4%.
What further stricter measures are currently under discussion
The credit standards were stricter than ever before in the second quarter of 2016. For many people, the dream of home ownership has thereby burst. Nevertheless, Politics is considering further tightening measures for the award of a credit agreement by credit intermediaries. Such measure would for example include the introduction of minimum capital sums and a ceiling for financing. Consumers are therefore subject to more and more restrictions. However, instead of continually patronizing the people and denying young people the opportunity to own property, the state should on the contrary slightly loosen the residential property credit directive. The value of a property should be better reflected again when it comes to approving a loan agreement for the consumer. At present, the level of income and the freely available assets are among the decisive factors for lenders.
The alternative to an investment apartment
The residential real estate lending policy prevents many investors the purchase of an investment apartment and thus obstructs an attractive investment. However, there is an alternative for affected investors: You can participate in real estate projects, which were previously only open to large investors such as family offices and insurers, with small sums in the form of a subordinated loan. In return there is a fixed interest rate, which is typically between 4% and 8%. Real estate crowdfunding is the new and young investment type. Investors can currently invest in the CALVIN BERLIN project on iFunded.de and receive an annual interest rate of 5% for a term of 12 months. This allows you to participate in a residential building with ongoing rental income and thus invest in numerous apartments at the same time. The big advantage: There are no fees for the investor.