After a short-lived boom, business model and earnings capacity questions are again coming to the fore for German bauspar banks. After a years-long period of low interest rates, building savings or bauspar contracts in Germany recovered significantly over 2023-2024. However, we consider this recovery is a flash in the pan. As interest rates for standard mortgages have peaked, customer demand returns to standard amortizing mortgages. Bauspar banks usually offer both bauspar and standard mortgage products, with the latter segment facing stiffer competition from market-leading retail banks.
What's Happening
Demand for bauspar products is normalizing after a material rise over 2023-2024. This stands in stark contrast to standard mortgages, for which new business and transaction volumes in the residential real estate market declined over the same period, as refinancing costs increased. Bauspar mortgages are option-like instruments and particularly attractive during periods of high volatility and structurally rising interest rates. Since market participants expect that interest rates will decrease and that demand for housing in Germany will remain structurally high, customer demand shifts back to standard mortgages.
Why It Matters
Bauspar products are an important subsegment of Germany's retail residential real estate financing market and indicative of customer expectations. Even though the total number of bauspar contracts is decreasing, 25% of Germans still have active bauspar contracts, which benefit from a 10% government subsidy on bauspar deposits for lower- and middle-income households. Bauspar banks account for €165 billion or about 13% of systemwide loans in Germany's residential real estate financing sector. With volumes of typically €30,000-€50,000, bauspar products are usually only part of a larger financing mix or are used for existing homeowners' modernization projects.
Past challenges could re-emerge. Before the European Central Bank's (ECB's) rate hike in 2022, bauspar products were difficult to market. Bauspar banks' profitability and cost efficiency metrics were trailing those of competitors with similar business risk profiles. After the rate hike, new bauspar business spiked. That said, improvements in earnings were largely cyclical. Weaker new business activity and the stabilization of standard mortgages' underwriting volumes indicate that bauspar contracts' relative attractiveness has decreased. New business generation has almost returned to pre-2022 volumes and bauspar banks yet again need to focus on underwriting profitability, while the inverse yield curve will add pressure over the short term. We expect bauspar banks' aggregate pretax return on equity--which increased to 4.1% in 2023, from 1.4% in 2021--will decline to 2%-3%, which remains below that of peers with similar business risk profiles.
What Comes Next
We expect the ECB will cut rates to 2.5% in 2025. Falling interest rates make it more difficult for bauspar banks to transform the strong contracted new business over the past two years into interest-earning assets.
Background In Brief
Bauspar products appeal to customers that aim to minimize their interest rate risk exposure. Bauspar contracts consist of a savings and a loan phase:
- During the savings phase, customers accumulate bauspar equity of up to 40%-50% of the contracted amount (the bauspar sum), which is then used as equity after becoming eligible for a bauspar mortgage at pre-agreed terms. Borrowing costs for the remaining 50%-60% of the bauspar sum tend to be relatively low.
- After the payout, the loan phase begins.
Bauspar contracts are usually combined with a bullet pre/interim mortgage, meaning customers accumulate bauspar deposits and replace the bullet mortgage with a bauspar mortgage once they become eligible for the latter.
We expect combined pre/interim mortgages will prevail. Pre/interim mortgages now account for more than 50% of German bauspar banks' aggregate balance sheet, while bauspar mortgages--despite a significant increase since 2022--constitute only slightly more than 7%. We expect this distribution pattern will persist. When interest rates are relatively stable or structurally declining, customers tend to view standard mortgages as more attractive than bauspar mortgages.
Related Research
This report does not constitute a rating action.
| Primary Credit Analyst: | Claudio Hantzsche, Frankfurt +49 69 33999 188; claudio.hantzsche@spglobal.com |
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