Orderly reduction of vulnerabilities in the German residential real estate market

The situation on the German residential real estate market – unlike the market for commercial real estate – has continued to stabilise. After having fallen strongly, prices have shown a moderate upward trend for around a year now. According to the Deutsche Bundesbank, overvaluations in the residential real estate market have decreased to a large extent. Following the sharp contraction in 2022, new lending has been recovering since the beginning of 2024. Available information suggests that credit institutions have not significantly relaxed their lending standards of late.

Nevertheless, levels of uncertainty are still high due to geopolitical and trade tensions, the current economic lull and structural changes taking place in individual sectors of the German economy. These developments have the potential to burden the labour market, as robust as it still is, and thereby cause an increase in the probability of default in residential mortgages.

BaFin will continue to closely monitor the developments on the residential real estate market and will again adjust the sectoral systemic risk buffer should there be any change in the risk situation.

The lowering of the systemic risk buffer from 2 to 1 percent will cause a decrease of around 2 to 2.5 billion euros in the capital currently contained in the banking system. This constitutes around 0.4 percent of the Core Tier 1 capital in the banking sector. The institutions are required to hold the reduced systemic risk buffer from 1 May 2025. BaFin has issued a general administrative act in this respect.

Countercyclical capital buffer remains at 0.75 percent

In addition, BaFin has decided to keep the countercyclical capital buffer at 0.75 percent. BaFin is aware that the cyclical risks that have built up over the past years have since diminished in the course of the subdued loan dynamics. It is clear, however, that these risks are still substantial. This is compounded by the aforementioned heightened uncertainty regarding the continued economic development and the special risks for the export-dependent German economy. Financing conditions for corporations have deteriorated due to the rise in interest rates. Non-performing loans and insolvencies in the corporate sector are intensifying significantly.

Remaining macroprudential buffers of more than 20 billion euros

By means of its package of macroprudential measures, BaFin is maintaining the resilience of the German banking system. As a result of the reduced sectoral systemic risk buffer and the unchanged countercyclical capital buffer, the banking system in Germany has capital buffers of more than 20 billion euros in total. In the event of a crisis, BaFin can release these buffers, thus enabling banks to absorb losses and ensuring they are not forced to unduly restrict their loan supply.