German central bank warns against too high real estate prices

Germany’s central bank warned on Thursday of skewed housing market valuations, calling it a “specific vulnerability” as property prices continue to rise.

“We’ve seen basically all the indicators – prices, credit – those indicators kept going up in Germany and you don’t really see a big effect from the pandemic,” said Claudia Buch, vice president at the Bundesbank.

Speaking to CNBC’s Karen Tso, she added that her team at the Bundesbank has estimated around 10% to 30% for price deviations from their fundamentals.

“What’s kind of a new development is that these overvaluations are also more widespread, so outside the big cities… [and] nearly 90% of households expect prices to continue to rise,” she said.

The latest financial stability assessment by the Bundesbank on Thursday also noted that German lenders would need to build capital buffers to address these potential problems in the housing market.

There is concern that overvaluation in the sector may cause banks to miscalculate the true value of collateral, leaving them more exposed to future price adjustments.

“Financial stability would be endangered if destabilizing developments in the real estate market were to occur, with rising credit volumes and prices coincident with a deterioration in borrower debt sustainability,” Germany’s central bank said in the report.

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