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Monday, 26 September 2011

German Mortgage Madness in The Netherlands

In my opinion, there is a simple truth concerning the housing market in The Netherlands. It is currently in a comatose situation, due to ‘peak housing prices and can only be released by a combination of: drastically lowering housing prices and lowering the mortgage burden of homeowners in The Netherlands.

However, not every party is yet convinced of this concept. Especially the German local, cooperative  bank, ‘Volksbank Emmerich-Rees eG’, thinks differently. It has the idea that lower mortgage interest rates can help Dutch people to buy a too expensive house, using a mortgage loan that can be considered too high. Therefore they opened a joint-venture with Dutch, Utrecht-based, advisory group Smartfee to hand out German mortgages to Dutch house-buyers.

The Dutch financial newspaper Het Financieele Dagblad ( writes on this story of which I print the pertinent snips:

For the first time, a German bank enters the Dutch mortgage market. The price fighter offers interest rates that are lower than the current Dutch rates; between 0.2% and 0.4%, when compared to the cheapest existing supplier in The Netherlands.

This is stated by German Volksbank Emmerich-Rees eG and advice agency Smartfee in a conversation with this newspaper. Utrecht-based Smartfee is the only intermediary firm to advice these mortgages to customers.

It is, however, a cautious step on the Dutch housing market. The bank will only supply  €25 mln in mortgages, according to Holger Zitter, managing director of Volksbank Emmerich-Rees eG. In comparison: normally, mortgages to the value of about €5 bln per month are supplied  in The Netherlands. When Belgium mortgage supplier Argenta entered the Dutch market, it had several billions of Euro’s at their disposal.

The German mortgage will attract few starters on the housing market, as a demand is that the customer invests its own money too. The bank supplies only annuitary mortgages until 90% of execution value. This execution value is in general about 85% of the sales value of the house. In The Netherlands it is common practice to finance much more than the execution value.

German banks, like the Volksbank, can offer a lower interest rate than Dutch banks, as they pay less interest on savings accounts. Besides that, German banks can easily hand out mortgage loans as collateral for Mortgage Backed Securities, in Germany called ‘Pfandbriefen’.

I am symphatetic towards the Volksbank’s habit to lend not more than (roughly) 75% (90%*85%) of the purchase value of a house and to offer only annuitary loans, instead of the interest-only (jumbo) loans that are so popular in The Netherlands.

The German banks had, as far as I’m concerned, always a more healthy attitude towards mortgage amounts and (especially) amortization than Dutch banks. However, I think that this will limit the succes of the Volksbank, as most Dutch people still want the maximum mortgage possible, without monthly amortization on the mortgage amount.

And in my opinion, even a mortgage of 75% of the current sales value of residential houses can be considered too high.

The current average price drop of less than 10% since mid-2008, is nothing compared to the average 200% raise of prices since 1995 (see the aforementioned article ‘peak housing prices’). On forced auctions of houses in case of a default, numerous houses have been sold for only 50-70% of the outstanding mortgage amount. That the Volksbank is more prudent than the Dutch banks in supplying mortgages, doesn’t say that the Volksbank is actually prudent.

Besides that, the current mortgage interest rates, as handled by the large Dutch banks, contain finally a kind of risk insurance for the banks. This might seem bad for the customers, but it is much better for the stability of the banks.

But now, again a foreign bank tries to become a price-fighter in The Netherlands. It does so by lowering the interest rates to the bare minimum, while running a substantial financial risk in case of a default and by trying to sell the mortgages as Mortgage Backed Securities. It sounds like a bad movie we have seen before.

Therefore I call this German Mortgage Madness.

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