According to Claudia Buch, vice president of the Bundesbank, there will still be overvaluations because the “overall dynamic” of the housing market has not changed.
Due to the high percentage of fixed-rate mortgages in Germany, homeowners are less susceptible to interest rate increases than some homeowners in other countries.
The German economy is reportedly at a “turning point” as a result of financial market price corrections, according to the central bank’s Financial Stability Review for 2022.
Despite warnings of overvaluation, the German central bank predicts a slowdown but no significant correction in the country’s real estate market, according to a report released Thursday.
According to Claudia Buch, vice president of the Bundesbank, “We do see a slowdown in the price growth for residential real estate, but it’s not that the overall dynamic has reversed,” Joumanna Bercetche of CNBC reported.
So the market is still overvalued, she explained.
According to the report, overvaluations in the market have grown, ranging between 15% and 40% in both German cities and towns and the entire country in 2021. It also notes the significant increase in German residential property prices from 2010 to mid-2022.
A sharp decline for the industry has been predicted by some analysts, including those at Deutsche Bank. According to data from Deutsche Bank, home prices have already dropped by about 5% since March. Jochen Moebert, a macroeconomic analyst at the German lender, predicts that overall, from peak to trough, home prices will fall by 20% to 25%.
According to Buch, the central bank is worried about the extent to which overvaluation is being caused by the easing of credit standards brought on by a very rapid increase in residential mortgage credit.
There is also a slowdown there, she added. “Thus, we do not currently believe that additional measures are taken to slow down the accumulation of vulnerabilities in this market segment, but we do think that we need to keep monitoring the market because we know that private households are very much exposed to mortgage loans, so that’s the biggest component in private household debt,” the statement continued.
Since fixed-rate mortgages make up a large portion of the German market, households there are less susceptible to interest rate increases than those in some other nations, she added.
The exposure to interest rate risk is primarily with the financial sector, specifically the banks that have made those mortgage lending decisions. Of course, the risk does not go away; it is still present in the system.
Other problems are also highlighted in the Financial Stability Review for 2022 by the Bundesbank, such as the deteriorating macroeconomic environment, the slowdown in German economic activity, rising energy prices, and the decline in real disposable income.
It claims that the German economy has reached a “turning point” as a result of financial market price corrections that have caused portfolios of securities to be written down. Additionally, it lists rising collateral requirements for futures trading as well as rising risks associated with corporate loans.
However, it claims that its financial system is “vulnerable to adverse developments” despite the fact that there has not yet been a fundamental reevaluation of credit risk in German banks.
The message, according to Buch, is crystal clear: We need a resilient financial system, and we must continue enhancing resilience over the coming years.