Germany’s central bank expects a slowdown but no significant correction in the country’s property market despite warnings of overvaluation, according to a report on Thursday.
Claudia Buch, vice-president of the Bundesbank, told CNBC’s Joumanna Bercetche: “We are seeing a slowdown in residential property price growth, but it’s not that the overall dynamic has reversed.”
“So we still have overvaluations in the market,” she said.
The report notes the sharp rise in German residential property prices from 2010 to mid-2022 and indicates that overvaluations in the market have increased, ranging from 15% to 40% in German cities and towns and across the country in its whole in 2021.
Some analysts, including Deutsche Bank, predict a sharp decline in the sector. House prices have already fallen about 5% since March, according to Deutsche Bank data, and they will fall between 20% and 25% in total from peak to trough, predicts Jochen Moebert, macroeconomic analyst at the German lender.
Buch said the central bank’s concern was how much of the overvaluation was driven by the easing of credit standards by very rapid growth in residential mortgage credit.
“There we also see a slowdown,” she said. “We therefore do not currently believe that any additional measures are being taken to slow the build-up of vulnerabilities in this market segment, but we believe that we must continue to monitor the market as we know that private households are very exposed to mortgages. loans, so it is the largest component of private household debt.”
The German market has a high share of fixed-rate mortgages, so households are less vulnerable to rising interest rates than in some other countries, she said.
“Of course, the risk doesn’t go away, it’s still in the system, but a lot of that exposure to interest rate risk is in the financial sector, the banks that have provided mortgages.”
The Bundesbank’s financial stability review for 2022 highlights other issues, including deteriorating macroeconomic conditions and slowing German economic activity, rising energy prices and falling disposable income real.
He describes the German economy as being at a “turning point” following price corrections in financial markets, which led to writedowns on securities portfolios. He also cites increased collateral requirements in futures markets and increased risks in corporate lending.
He says there has been no fundamental reassessment of credit risk in German banks so far, but says its financial system is “vulnerable to adverse developments”.
“The message is very clear, we need a resilient financial system, we need to continue to build resilience in the next period,” Buch told CNBC.
Additional reporting by Hannah Ward-Glenton