Specialised Financial Intermediaries and the Impact of Savings and Loan Contracts on Real Estate Finance

Abstract

The significant macroeconomic importance of housing market stability has been prominently highlighted in the context of the 2008 US sub-prime mortgage financial crisis. Evaluating the aftermath of this global economic crisis, the notorious stability of German housing markets in comparison to other industrialised nations is a particularly interesting case for empirical investigation. An idiosyncratic and yet vital institutional characteristic of German housing financing markets, regularly neglected in the academic literature, are building and loan associations (“Bausparkassen”). These institutions constitute a special case of financial intermediaries because they exclusively sell the rather unique mortgage financing instrument of savings and loan contracts (SLCs). Based on an overlapping-generation model, these contracts give their holders the option to take out a housing loan in the future at an interest rate fixed on the date of conclusion of contract.In this paper, we empirically examine whether this mortgage financing instrument creates the anti-cyclic incentive mechanisms that its peculiar option-like structure would theoretically suggest. More specifically, we investigate whether SLC contract holders indeed have a higher propensity to borrow under increasing interest rate regimes, thereby supposedly serving as an important stabiliser of housing market liquidity in crunching environments. Controlling for important macroeconomic covariates, we show that both SLC savings deposits and SLC loans taken by households precisely reflect this counter cyclicality to interest rate changes. These findings thus broadly corroborate SLCs as an important specificity of German mortgage financing contributing to the overall stability of corresponding housing markets.