5 questions for Dr. Louis Hagen, President of the vdp and Chairman of the Board of Management of Münchener Hypothekenbank

I was very pleased with the positive response, especially the great support that our traditional product enjoys in politics and supervision, but also the attention of the general public. However, it should certainly be in the spirit of the father of the Pfandbrief that we are now turning our full attention back to factual issues. After all, it is up to us to live up to the great trust that all stakeholders place in the Pfandbrief and its further development, and – figuratively speaking – to pay interest on it. This is the aspiration of all members of our association, and it is what drives me, too. We are thus laying the foundations for the next anniversary, which our children’s children will celebrate in 2069.

In the third quarter of 2019, we saw the vdp property price index rise by 5.9% year-on-year. For the full year 2019, I also expect the German property market to see a price increase of just under 6%. This means that prices will continue to rise, just not as rapidly as two or three years ago (editor’s note: +8.0% in 2018; +6.8% in 2017, 6.4% in 2016). Across all regional markets and across all segments, we continue to observe a demand surplus on the German real estate market. Real wage growth and an influx into metropolitan regions, where price increases are particularly pronounced, are driving this dynamic.

Risk-oriented lending by issuers and long-term refinancing via Pfandbriefe are additional anchors of stability for the German real estate market. This is because the proven safety features of the Pfandbrief – the conservative calculation of the mortgage lending value and the 60 percent lending limit for Pfandbrief cover assets – largely protect investors from property price fluctuations and potential losses in value of the cover assets. So far, we have not seen any signs of a possible bubble forming on the German real estate market.

The preparations of the Federal Ministry of Finance for the upcoming amendment are well underway. The implementation period prescribed by law has been running for a few weeks now and will last until the middle of next year. I expect the draft bill to be published this summer.

In it, the adjustments to the Pfandbrief Act resulting from the harmonization package will be a focal point. In addition to technical adjustments in the area of derivatives and liquidity management, the draft should also include the issue of a possible shift of maturities for Pfandbriefe and a regulation on building insurance. In the long term, the question also arises as to whether we want to permit further classes of cover assets in Germany, and if so, whether these should be regulated in the Pfandbrief Act or in a separate law on covered bonds.

For the third CBPP3 purchase programme, which was resumed last November, we expect net purchases of around EUR 20 to 24 billion per year. In gross terms, i.e. including reinvestments from the CBPP portfolio, this year’s purchases will be around EUR 55 billion. This doubles the central bank’s demand compared to last year. The yields in the covered bond market, which have been distorted for years, have already hardened again since autumn last year and the market environment threatens to be determined by the central bank for years to come.

First of all, I hope that Basel IV will be implemented with a sense of proportion. Otherwise, German real estate financiers will face a massive additional burden. Instead, legislators should strengthen the European banking market and avert a rise in the cost of lending or a deterioration in the competitive situation. For this reason, we advocate an alternative, but naturally Basel-compliant solution for the calculation formula of the so-called output floor.

In addition, I would like to see the current interest rate environment and the issue of digitization playing a greater role in the Mortgage Lending Value Directive. We consider it necessary to lower the minimum capitalisation rates moderately in order to take account of the low interest rate environment prevailing over many years. In this way, the mortgage lending values will at least come closer to the market values that have systematically widely diverged from them, thus facilitating refinancing via Pfandbriefe somewhat. In addition, the Directive on the Determination of Mortgage Lending Values should be opened up to automated valuation procedures in retail business that have long been standard practice in other European countries.

Finally, I would like to see better coordination of the various initiatives in the area of sustainable finance. At present, a large number of different bodies are dealing with the subject and coordination is only rarely carried out. It is obvious that this is not conducive to achieving the desired results.