The underlying reasons of fatality are in many cases poor health conditions (COPD, diabetes, coronary disease), rather than age per se.
Italy (and Germany) have about 3.5 times as many 80+ years olds as a share of the population, and hence the death toll, and call on medical facilities, could be relatively high if the spread is not curtailed.
To prevent the spreading of the virus which could overwhelm the medical systems, pretty drastic measures have been taken especially in China and more recently Italy. With 15% of cases requiring hospitalization (per Chinese data), resources can very quickly be overwhelmed, unless the pace of growth is slowed from the current 3-6 day doubling.⁷\n
As more and more people are infected in Germany you can expect more drastic measures, like school closures, and travel restrictions to limit the speed of the spread. Much though will depend on the willingness of the population to observe good preventative care (the hand washing), social distancing and self quarantine. The more disciplined people are, the slower the spread. In that sense we do hope that our German friends live up to their reputation.\n
The economic impact can be quite substantial. In China growth has turned sharply negative with exports down 17% in February year over year. Growth could be negative 5-8% in February on an annual basis. In Singapore, which has done a great job in testing for and tracking the outbreak, in contrast, is much less (maybe a 1-2% reduction in growth).\n
The big question is how long this impact will last, and will there be a quick rebound.\n
The normal flu abates when enough people have gotten ill, developed immunity, or have been vaccinated. Warm weather helps, but only partially--the Spanish flu extended its massive toll of 50 million deaths on the world population for over 2 years. Of course the race for a vaccine is on, but experts seem to expect that a solution on a large enough scale may take at least a year. ⁸ Therapeutics might be developed more quickly, with clinical trials already under way.⁹\n
Governments are not likely to tolerate even the lower bound of the estimated potential death toll rate of about 1%, nor hospitals that no longer can accept patients. And hence we can expect severe disruptions caused by continued curtailment measures, as in Italy. Even when new cases have largely come to a halt as in China, many measures need to remain in place to prevent a renewed outbreak.\n
In Italy and Iran, which both have relatively good health systems, the Coronavirus has spread wide and far and its spread maybe way underestimated (given the high death toll in these countries. Given the many countries in the world have much worth health systems and tracking in place, it is hard to imagine that the curtailment will fully work to stop the spread. And this seems the prevailing view among eminent immunologists. ¹⁰\n
Hence, curtailment measures and the negative confidence effect on spending is likely to have an economic impact until a vaccine or medicine is ready in volumes that keep flare ups from spreading. The size of the effect depends on how effective countries respond, i.e. more like Singapore or more like China?\n
We can indeed observe the government bond market (which is one of the best predictors of the economic outcomes) reacting very strongly. In the US--which so far has relatively few cases-- interest rates have dropped over a full percent in under a month. This is quite unprecedented.\n\n\n
In Germany, the 10 year bund has dropped from-0.4 to as far as -0.8%. Both markets show the lowest rates by far on record.\n\n\n
This is as clear a forebode of a recession as you can get. But not necessarily of a depression. The availability of medication, a population that practices effective social distancing and hygienic methods, with a moderate (from a world population growth perspective) overall death toll could lead to a rebound anywhere from 3-9 months.\n
Upward price pressure that we have seen in the hot urban markets of Germany may slow. But a decline is not in the cards unless there will be more prolonged selling pressure. The demand is by and large driven by very low interest rates and job growth in cities.\n
Selling pressure can come about if many people would vacate their homes, or if unemployment shoots up more permanently.\n
In the hot urban markets the impact of homes being vacated is unlikely to be sufficient to cut the lack of housing supply, that is a multiple of a realistic upper bound of the death toll.
The impact through unemployment could be higher. For now in many urban areas the employment situation has been tight, providing some cushion to any decline in jobs. Workers in the most affected industries like tourism and travel are likely to receive temporarily generous unemployment support. Business owners though may run into liquidity problems and be tempted to sell property.
On balance we expect, prices and demand to slow, but we don't as yet foresee a drop in the well priced properties in urban markets, as we expect that Germany manages the crisis more like Singapore than China. The fatality rate in Germany is 1/10 th of the Chinese rate when comparing similar periods of spread, suggesting that Germany is much more like Singapore, and is able to curtail the spread much better.\n
In other words, in this outlook, you can afford to be more picky, when hunting for a house in these urban markets, but don't stop searching and keep in mind you get the lowest mortgage rates the world has ever seen.\n
For those who own a home, notably who have a mortgage for at least 5 years, this year is a very good time to refinance that mortgage or lock in your follow up financing rate. This low interest period may not last. Typically markets look half to a full year ahead. And a recession may not last beyond a year.\n
1. This article is based on an extensive review of literature, and available data, discussion with many ex-colleagues and friends especially in Washington DC: people with first hand knowledge of the Chinese situation, from leading medical institutions, and those who study the economic fall-out.\n
2. For influenza death toll see e.g. https://www.cdc.gov/flu/about/burden/past-seasons.html\n
3. The Diamond Princess data: https://www.statista.com/statistics/1099517/japan-coronavirus-patients-diamond-princess/ And https://www.medrxiv.org/content/10.1101/2020.02.20.20025866v2.full.pdf\n
4. Existing plus probable deaths over cumulative confirmed cases: https://www.statista.com/statistics/1092967/china-wuhan-coronavirus-key-figures/\n
5. Best source of up to date infection data: https://www.worldometers.info/coronavirus/\n
6. Detailed analysis of the Chinese data on composition of patients with COVID-19 as of Feb 11, 2020: https://jamanetwork.com/journals/jama/fullarticle/2762130\n
7. The case for hospital resources being overwhelmed: https://www.statnews.com/2020/03/10/simple-math-alarming-answers-covid-19/\n
8. See https://cepi.net/news_cepi/2-billion-required-to-develop-a-vaccine-against-the-covid-19-virus/ for what could be a timeline for vaccine development.\n
9. Emergency preparedness: https://jamanetwork.com/journals/jama/fullarticle/2762690?resultClick=1\n
10. The case for a controlled pandemic: https://www.vox.com/science-and-health/2020/3/6/21161234/coronavirus-covid-19-science-outbreak-ends-endemic-vaccine\n\n
Basic facts and observations\n
Immunity: up to 80 percent of people could be immune from COVID-19.
Death rate: the maximum fatality rate in the overall population could be on the order of 1%--depending especially on the age structure and health of the population.
Age/prior conditions: with up to 15% fatality rates in China in the over 80 and 0.2% in the 40 and under, age and prior conditions are a critical factor.
Care and resources: with 15% of cases in China requiring hospitalization, resources can very quickly be overwhelmed.
A Bausparvertrag is a type of loan that is still quite popular in Germany and is provided by building societies (Bausparkassen). These are complex products that many people (including unfortunately most mortgage advisors) don't understand well. They can be quite beneficial but also problematic. At Hypofriend we therefore have built special calculators for this product that help us to evaluate with you, if the product makes sense for you.\n
the risks are large hidden costs (in the form of upfront fees, and forgone interest earnings) and unexpected interest rate exposure
the possible benefits are the possibility to fix your interest rate for a long time at low cost.
What exactly is a savings contract (Bausparvertrag)?\n
A Bausparvertrag (BSV) is a savings contract that is linked to a mortgage. It comes in two forms:\n
In the first and most common form, the savings contract precedes the mortgage. Once you have saved enough you may become eligible for a mortgage loan at a preset interest rate.
In the second form, you immediately obtain a loan, but instead of repaying this loan you pay into a savings programme. The savings will then be used at a later stage to pay off the mortgage.
This article only deals with the second form.\n
To understand this product it is best to realize that you are in affect dealing with three products:\n
An Annuity Mortgage with zero principal repayment.
A savings contract in the same amount. Instead of repaying each month the mortgage, the repayment portion of the monthly rate is used in the first phase towards reaching the savings goal required by the savings contract (30-50%).
A Bauspar Loan. Once the savings goal of the savings contract is reached and you are eligible for pay-out, the savings and a new Bauspar Loan are used to pay-off the annuity mortgage. This Bauspar loan is in turn repaid at a previously agreed interest rate, till the loan is fully repaid. In other words: you can fix the interest on your mortgage till it is fully paid off.
BUT, it comes with a number of risks and costs:\n
There are upfront fees of the Savings Contract. Sometimes 1%, sometimes more. So if you stay in the house for a short period the BSV does not make sense for you. If you spread these costs so to say over the lifetime of the loan they just imply a small mark-up. They can be seen as a commitment fee to ensure that you have the intent to stay long.
Sometimes these fees are paid in cash, sometimes they are rolled into the savings contract and your first savings payments go toward paying off the fees.
The interest that the BSV pays on your savings is very low. Currently mostly 0.1%. Compared to a standard annuity mortgage this means you forgo considerable interest earnings. A proper evaluation takes this cost into account in calculating the effective cost of the BSV. So if the overall interest on the BSV is attractive, the BSV may still be a good deal.
You may have an interest rate exposure gap. What do we mean by that? After the fixed interest period of the annuity is over, it may take some time before the BSV pays out, as you may not have saved enough. We refer to this period as the interest gap. The bank will provide follow up financing to the annuity to bridge the gap, but the interest rate depends on market circumstances at that time and may be significantly higher.
Long stay: If you plan to stay in your house for a long time then a savings contract may work well. A savings contract provides for a very long fixed interest rate period at reasonable rates. Hence if you know quite sure you will stay long in your house or apartment, it may be a good solution.\n
If you expect modest income growth: In this situation a full are partial savings contract may help to protect you from the risk of considerably higher interest rates sometime in the future.\n
Unlikely to refinance: If you are unlikely to refinance your loan, the savings contract may be a good idea. It is not such a good idea for most people with high income growth, or who live in areas where houses increase rapidly in value. They typically want to refinance their mortgage at some point. When interest rates are low they for example may consider buying a larger house or buy a second home either as investment or as a holiday home, or to use the proceedings to diversify their assets.\n
The complexity of the product can allow the bank or the mortgage broker to create a smoke screen and legally they are not obligated to show the effective cost of their product. At Hypofriend we devised a method to compare the cost of this product to a normal annuity. This involves very complex calculations, and is rarely done: no easily available calculators are available online. We see many examples of reasonable rates, but also very costly effective rates.
It is not fully guaranteed that the savings contract will be allocated to cover the remaining loan balance after the end of your fixed interest period (e.g. 10-year fixed interest period).
You most likely don't want to fix your interest for the full period. Your income grows, and hence most people pay-off their mortgage quicker then envisaged. Which means you end up paying a high rate for insurance you don't use. Also frequently people will want to move to a larger house or a different town or country. Locking yourself in for 30 years is a very long time !
In general, expats tend to live in Germany for shorter periods. This makes it less likely that they can use the main benefit of a savings contract, namely the long fixed interest period. Also they are less likely to recoup the high initial closing cost, and the implicit cost of low returns in the savings during the savings phase..
The complexity of savings contracts puts expats at a particular disadvantage. The terms & conditions of savings contracts are non-transparent and have small print clauses that are hard to understand – even in German. We have seen contracts with broker fees of over 6 percent built in! Very few brokers are transparent about the actual cost and drawbacks of the product as it requires complex calculations that are not easily available.
If you have received an offer with a savings contract and you are not sure about the details, Hypofriend can help you evaluate your offer and show you the effective interest cost of that offer.
If you already have been saving into an existing savings contract, Hypofriend can help you use that existing contract as a downpayment for a new property purchase.
We can use the BSV intelligently: e.g. if you want to increase your payments over time or create partial certainty about interest rates for a longer horizon.
Most importantly, Hypofriend can help you find the right German mortgage product that takes into consideration the optimal fixed interest period, downpayment and repayment schedule given your financial situation.
"Insights into the system of German Bausparen." https://www.ww-ag.com/rmedia/media/konzern/dokumente_2/bausparen_1/201501008_Insights_into_German_Bausparen.pdf.
Mortgages are complex but we’re here to help, that’s why we’ve created this series of mortgage deep dives to help you understand how mortgages in Germany work.
The following article will deep dive into your follow-up financing options as a German mortgage owner. In Germany, there are three main forms of refinancing options, we will describe each in the following article below:
First of all it is a human tragedy, but in terms of death toll the spread of the virus is still extremely well contained and the toll does not compare even to a normal influenza yet--the death toll of.
© Hypofriend GmbH 2020
© Hypofriend GmbH 2020