On the problem of inflation-related liquidity restrictions in real estate financing

Despite the ECB's turnaround in its interest rate policy in the second half of 2022 as a late reaction to the highly underrated persistence of high inflation rates in the euro area real longer run market rates cannot be judged as restrictive neither in the ex post nor in the ex ante view. Nevertheless, bank lending provisions became tighter and both, the demand for housing investments and mortgage loans, went down sharply.

Against this background, the authors point to the significance of cash flow effects in the case of the widely used annuity loans in housing finance and above all emphasize the role of the so-called front loading phenomenon. From this point of view, higher nominal market rates have the capacity to trigger strong extra financing burdens to housing investors in the first phases of the credit life, even in the case of fully anticipated inflation rates and unchanged real rates. Such liquidity effects put much pressure on the solvency or the willingness to pay. This is especially true for loans in the form of a percentage annuity, as an additional maturity shortening effect occurs here. Such loans are quite popular in Germany.

Looking ahead, there is also a real threat to the stock of housing loans when it comes to a refinancing of the big stock of cheap housing-related credit, a risk that also bears macroeconomic and financial stability implications.