Bundesbank warns of threat posed by soaring property values

German stability report echoes ECB’s recent warnings

The German central bank warned on Thursday about the threat to the nation’s economic stability by runaway property valuations that bear less and less relevance to their supposed real worth. 

Real estate

Publishing its latest stability report, the Bundesbank said: "Price exaggerations in the residential real estate market have tended to increase further. Bundesbank estimates put them at between 10% and 30% in Germany in 2020.” 

Arguing that banks could not be correctly estimating the value of collateral and be vulnerable to potential price adjustments, the report said: “Financial stability would be at risk if destabilising developments were to take hold in the property market, whereby rising credit volumes and prices were to coincide with a deterioration in borrowers’ debt sustainability.”

At the start of the Covid-19 crisis, the so-called "counter-cycle buffer" for banks was cut from 0.25% to 0%. Although the measure may have bolstered lending in the succeeding eighteen months, the central bank said that bank must now hold back more funds and lessen their risk exposure. 

In a statement, Bundesbank vice president Claudia Buch said: “The countercyclical capital buffer should be built up again early on.” 

ECB

The German central bank’s warnings echoed the warnings made by the European Central Bank (ECB) in its biannual stability report last week. 

The ECB said: “Risks of price corrections over the medium term have increased substantially amid rising estimates of house price overvaluation.” 

It added: “Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and input price increases are weighing on the construction sector’s ability to expand housing supply, which is putting upward pressure on house prices.” 

The Frankfurt Stock Exchange's Dax performance index closed up by 0.2% at 15,917.98 on Thursday, 16% above its 2021 starting level.

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