The price of property in Germany has been on the rise, driven by low interest rates and cheap credit, and the overheated market could be risky.
House prices in Germany are getting dangerously close to a bubble, a recent report by the country’s central bank Deutsche Bundesbank has revealed. According to Bundesbank’s 2017 financial stability review, there is a risk of unsustainable valuations and lending in the residential market.
“The real estate market in Germany is of major importance to the economy as a whole, with lending for house purchase accounting for over two-thirds of household debt,” said the report. “More than half of all loans granted by German banks to German households and non-financial corporations are housing loans.
“Experience in other countries has shown that if a real estate bubble accompanied by a strong build-up of household debt bursts, significant economic costs can come in its wake.”
Demand and supply
The sustained property price surge largely reflects the fact that demand for housing remains high relative to supply. It is being supported, among other things, by households’ positive income prospects and the favourable funding conditions.
However, Bundesbank model calculations point to over-valuations in a number of regions – especially in urban areas. The overvaluations are calculated relative to an estimated underlying property price that is based on economic fundamentals such as income, interest rates and demographic factors.
Germany’s influential Council of Economic Experts has also warned that the current conditions in the country were a risk to the financial system.
“We’re in this low interest environment that has been going on for a long time, and so there is good reason for these high prices (for property),” Isabel Schnabel, a member of the council, said. “But when the interest rates rise again these prices could go very quickly in the opposite direction.”