“Could it be any clearer? The world’s central bankers (including our Fed, both pre and post crisis) manipulate market interest rates artificially low and foster risk-taking/speculation, borrowing, asset bubbles and busts, and financial instability.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Europe’s long experiment with ultralow interest rates is prompting unexpected shifts in Germany’s deeply entrenched culture of saving….The shift in home buying is more pronounced. The volume of residential-real-estate transactions almost quintupled to €23.5 billion ($25.4 billion) in 2015 from €4.8 billion in 2008, according to Statista, a data firm. Germans have long opted for renting over buying, supported by tenant-friendly laws and a fear of debt. In German, “debt” and “guilt” are the same word, Schuld, and many Germans equate the two. Now, however, low interest rates have made borrowing extremely affordable and sparked fears among some Germans of inflation. Home buying has become something that offers risk-averse Germans a sense of security, said Olaf Stutz, professor of asset management at the Frankfurt School of Finance & Management. Buyers are people like Holger Schmidt, an industrial engineer who never considered buying a home until a few years ago. The 43-year-old father of two bought two apartments, one to live in and one to rent.“ After the risk of inflation grew and the future of the euro became uncertain, I changed my mind,” said the resident of Aschaffenburg, in Bavaria, who took the plunge in 2012, when interest rates were already falling dramatically. Real estate’s new haven status trumps what Mr. Schmidt calls a huge fear among Germans: “What if I lose my job, how will I pay the mortgage?” Parents now chat about the rising value of their homes at their kids’ parties. “The more you hear about it, the more you want to do it on your own,” he said. “It was like becoming aware of the upside, when before you were looking only at the risk.”, Madeleine Nissen, “Germany’s Cautious Savers Find New Taste for Risk”, The Wall Street Journal, January 26, 2016

Markets

Germany’s Cautious Savers Find New Taste for Risk

Low rates cause shift from bank savings deposits to index funds and real estate; buying a home instead of renting

unnamed (12)

A pedestrian looks at residential property displayed for sale in an estate agent window in Ingolstadt, Germany, in October. Low interest rates have spurred more Germans to opt for buying homes instead of renting. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS

By Madeleine Nissen

FRANKFURT—Europe’s long experiment with ultralow interest rates is prompting unexpected shifts in Germany’s deeply entrenched culture of saving.

For decades, Germans have faithfully parked much of their personal wealth in old-fashioned savings institutions while shunning home buying and its associated debt. Those habits were cemented by the shock of hyperinflation in the 1930s and supported by a strong postwar economy and an inflation-averse central bank that kept returns predictable.

But since the financial crisis hit and the European Central Bank slashed interest rates for countries sharing the euro to around zero, Germany’s saving formula has collapsed—and savers are reacting by taking on more risk.

“Permanent low interest rates changed my wife and me from savers into investors,” said Thomas Krauss, a 55-year-old marketing expert from Düsseldorf who used to contribute to a retirement savings plan.

Old-style pension plans “yielded almost zero,” so during the financial crisis, Mr. Krauss opted to invest in index funds. His wife of 30 years “felt uneasy about changing from the familiar investment mix of insurance and saving deposits,” but they switched about six years ago and have since outperformed traditional savings returns, he said. The recent downturn in the stock markets doesn’t make Mr. Krauss nervous. “The shift was a strategic decision and independent of short-term developments,” he said.

unnamed (13)

Germans have among the world’s highest household rates of saving, according to the Organization for Economic Cooperation and Development. Only 14% of Germans invest in equities, compared with 56% in the U.S. and 23% in Britain, according to finance-industry association Deutsches Aktieninstitut.

The shift in home buying is more pronounced. The volume of residential-real-estate transactions almost quintupled to €23.5 billion ($25.4 billion) in 2015 from €4.8 billion in 2008, according to Statista, a data firm.

Germans have long opted for renting over buying, supported by tenant-friendly laws and a fear of debt. In German, “debt” and “guilt” are the same word, Schuld, and many Germans equate the two.

Now, however, low interest rates have made borrowing extremely affordable and sparked fears among some Germans of inflation. Home buying has become something that offers risk-averse Germans a sense of security, said Olaf Stutz, professor of asset management at the Frankfurt School of Finance & Management.

Buyers are people like Holger Schmidt, an industrial engineer who never considered buying a home until a few years ago. The 43-year-old father of two bought two apartments, one to live in and one to rent.

“After the risk of inflation grew and the future of the euro became uncertain, I changed my mind,” said the resident of Aschaffenburg, in Bavaria, who took the plunge in 2012, when interest rates were already falling dramatically.

Real estate’s new haven status trumps what Mr. Schmidt calls a huge fear among Germans: “What if I lose my job, how will I pay the mortgage?”

Parents now chat about the rising value of their homes at their kids’ parties.

“The more you hear about it, the more you want to do it on your own,” he said. “It was like becoming aware of the upside, when before you were looking only at the risk.”

The shift is being encouraged by German banks, which are hawking more aggressive investment options as low interest rates squeeze the margins on lending.

“Advisers desperately try to sell their overpriced products,” said Jürgen Becker, an office worker near Düsseldorf. He said the marketing push is so intense—despite his obvious lack of interest—that it seems driven more by sales quotas than financial acumen.

“I have lost confidence that my bank would give me proper advice,” said the frustrated saver, whose displeasure is shared by many Germans.

The Association of German Banks said its members are acting appropriately. “I do not think that banks are pushing products too much,” said spokesman Thomas Schlüter. “The prices clients pay in Germany for banking products are extremely low,” meaning banks must find other ways a way to earn money, he said.

German banks over recent years earned roughly 75% of their income from the margin between rates on savings accounts and the loans they could make, according to statistics from the Bundesbank, Germany’s central bank. Plunging rates dragged German banks’ interest revenue down to €204 billion in 2014 from €419 billion in 2007, according to the Bundesbank.

“German banks’ business models are particularly vulnerable to low interest rates because Germany is a country with very high saving deposits,” Bundesbank board member Andreas Dombret said.

 

Posted on January 27, 2016, in Postings. Bookmark the permalink. Leave a comment.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: