Germany and Austria being advised to rein in housing price boom

The European Union’s financial stability watchdog said on Friday that Germany and Austria should set mortgage restrictions and force banks to build up more capital to prevent a housing price boom.

The European Systemic Risk Board’s suggestions, which were released on Friday but were made in early December, were intended to help authorities in the two countries move more quickly.

“The ESRB had previously issued warnings to Austria and Germany in 2016 and 2019, respectively, but these vulnerabilities had not been adequately addressed,” the ESRB stated.

The ESRB wants Berlin and Vienna to set limitations on how much property purchasers can borrow in relation to their income and the purchase price.

In a letter to the ESRB published on Friday, German Finance Minister Christian Lindner pushed back against the implementation of a loan-to-value ratio for home buyers, arguing that banks would merely be expected to operate “prudently.”

The ESRB further suggests that banks be required to maintain capital buffers to absorb potential losses via a countercyclical buffer and a sectoral systemic risk buffer for home loans.

Since the suggestion was released on December 2, Germany’s financial authority BaFin has implemented a 0.75 percent countercyclical buffer and stated that a supplemental 2 percent cushion for residential mortgages will be implemented.

Its Austrian counterpart announced on Friday that it sought to tighten its own restrictions after discovering that more than half of new mortgages did not meet its non-binding standards.

A 20% down payment is required, as are servicing charges that do not exceed 40% of a household’s income and a maximum maturity of 30 years.

“We do not have a property bubble on the verge of bursting,” Gottfried Haber, deputy governor of Austria’s central bank, told reporters.

“However, we have high price growth, high lending growth, and so systemic risks that have risen in recent months, which we must address aggressively.”

According to EU guidelines, countries that receive ESRB recommendations must “act or explain” why they haven’t done so. However, the watchdog is unable to impose fines.

The ESRB’s decision comes as the European Central Bank reduces its large asset purchases and prepares to raise interest rates after years of robust stimulus.

Low borrowing costs have aided in the acceleration of property values in the wealthier euro zone countries, notably in metropolitan cities.