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Frankfurt am Main | 21.10.2013

Possible overvaluation of residential property in German cities

Photo shows property in Frankfurt Housing prices in German cities have been rising so strongly since 2010 that a possible overvaluation cannot be ruled out. 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 says.

Over the past three years, the prices for houses and apartments have risen by a total of 8¼%. This 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 to households.

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.