Housing prices in German cities have been rising so
strongly since 2010 that a possible overvaluation cannot be ruled out, according
to the Deutsche Bundesbank, the German central bank. Over the past 3 years, the prices for
houses and apartments have risen by a total of 8¼%.
This is the finding of an article contained in the
Bundesbank’s most recent Monthly Report. According to this article, there are no
signs of substantial exaggerations in the housing market as a whole.
Nevertheless, price rises have been observed in urban centres, in particular,
which “are difficult to justify based on fundamental factors”, the Bundesbank
The rise in prices in the past 3 years is due to a
“marked gap between property prices in urban and rural areas”, the article
explains. In Germany’s largest cities, prices of apartments have risen by more
than one-quarter during this period. The Bundesbank says that this could “give
rise to fears of a broad-based property price boom”.
Exaggerations in urban centres
Calculations prepared by the Bundesbank indicate
that prices in the urban housing markets could be up to 10% higher than the
level which can be explained by demographic and economic factors alone. “In the
attractive large cities, the upward deviations in this segment are as high as
20% in some cases”, the study revealed. This applies to price developments in
the large cities of Berlin, Hamburg, Munich, Cologne, Frankfurt am Main,
Stuttgart and Düsseldorf. These figures are the outcome of an empirical study.
As the Bundesbank emphasises, however, these findings are fraught with a
considerable degree of uncertainty.
According to the Bundesbank, it is, however,
unlikely that the rise in prices will remain limited to urban centres. As it
states in its Monthly Report, there are “clear signs of a dispersion from cities
to their surrounding areas”. It cannot be ruled out that “inflated expectations
or speculation motives are fuelling a regional dispersion of price impulses”,
the report goes on to say.
Low interest rates are fuelling the demand for property
According to the article, the price hikes are being
driven by the strong demand for property, which has been greater than would
generally be expected during a period of economic recovery. In addition to the
improved economic outlook, the Bundesbank says that the impact of the financial
and sovereign debt crisis has also played a role in this development. The German
property market, for example, which had thus far been calm became more
attractive to international investors after the property market price bubble in
the US and in a number of European housing markets burst. Furthermore, the
appeal of property investment has grown given the lower returns on financial
assets in recent years. “The belief that the value of one’s assets can be best
secured through property ownership was certainly an argument for many households
to consider investing in property”, the Bundesbank points out.
Any price corrections in the housing market at the
current juncture could give rise to perceptible wealth losses for households,
the report explains. In light of current developments, however, the Bundesbank
believes that it is very unlikely that this will result in macroeconomic risks
or dangers to financial stability. In the Bundesbank’s assessment, given the
limits on mortgage lending, lenders such as banks would probably not be severely
affected. According to recent surveys, banks have reported a tightening of their
lending standards and only a moderate increase in the volume of mortgage loans
Incentives for investors intact
The Bundesbank is not expecting an easing of price
pressures in the short term. Despite the steep growth in housing construction,
the housing supply is still not sufficient to meet the additional demand for
housing. This is particularly the case for apartments. Against this backdrop,
the Bundesbank is opposed to restricting the amount by which rents can be
increased. Further robust growth in the construction of multiple-family
dwellings can only be expected for as long as investors continue to see enough
yield potential in the buy-to-let market, the Bundesbank says.
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