Bundesbank warns of property bubble

Last updated: October 21, 2013 7:05 pm

German city apartments overvalued, warns Bundesbank

By Michael Steen in Frankfurt and Alice Ross in Baden-Baden

The Bundesbank has warned that apartment prices in Germany’s biggest cities could be overvalued by as much as 20 per cent, stepping up its concern about a real estate boom in the powerhouse of the European economy. The warning will feed into German concern that the European Central Bank’s monetary policy is far too loose for the country. The bank’s main refinancing rate is 0.5 per cent, a record low.It also adds to signs that international investors are fuelling rising property prices around the world. The trend reflects the lack of opportunities investors regard as a safe haven and low returns for traditional asset classes such as bonds and stocks.

Rapid price rises have particularly affected the seven largest cities in Germany, the central bank said on Monday, although the value of houses had risen at a more moderate pace. Flats in Berlin, Munich, Hamburg, Cologne, Frankfurt, Stuttgart and Düsseldorf had, on average, seen prices rise more than 25 per cent since 2010.

“After the real estate bubbles in the US and several European house markets burst, the German property market, which had been quiet for many years, became more attractive to international investors,” theBundesbank said in its monthly report for October.

Low interest rates – imposed as a result of the eurozone’s economic slump – were making mortgages more affordable and prompting savers to seek alternatives to putting their money in banks, the central bank noted. A slowdown in construction during the crisis has also limited supply.

Asian cities such as Hong Kong and Singapore have imposed new taxes on foreign buyers in an attempt to limit the effect on their housing markets. Prices of the most expensive homes are now above their pre-crash highs in Hong Kong, according to data from estate agent Knight Frank.

The other place where prices of high-end properties have risen above their pre-2008 peak is London. Nearly three-quarters of all newly built homes in central London are being bought by foreign buyers, it was revealed this summer.

In the US, industry watchers are concerned about accelerating prices in New York, Washington, Los Angeles and other big US cities that have seen growing demand for high-end residential properties from deep-pocketed Americans and foreign investors seeking stable investments.

The property market trend is unusual in Germany, a nation of home renters with historically slumbering property markets, and is in sharp contrast to the rest of theeurozone, where house prices are near seven-year lows following property slumps in Spain, Ireland and the Netherlands.

If the Bundesbank wanted to cool the market it would either have to persuade the ECB to raise interest rates or introduce so-called macroprudential measures in Germany, such as making banks set aside more capital for mortgage lending.

“In the short term, the [upward] price pressure will not ease,” the Bundesbank said. But it was “not very likely that the price structure on real estate markets currently represents a serious macroeconomic risk. The observed price movements are an expression of delayed increases in supply.”

However, “the empirical evidence shows there is no substantial overvaluation of the German residential property market as a whole”, the central bank said.

The Bundesbank has repeatedly expressed concern about the housing market after aboom started in Berlin, Frankfurt and Munich around 2010.

This has spread to smaller cities as higher prices in larger conurbations have driven property investors in both residential and commercial real estate to seek opportunities in so-called “B” towns such as Dortmund or Hannover, where prices are lower but liquidity risks are higher.

The big 10 cities remain in the focus but the desire of investors to achieve higher returns will flood the secondary cities with capital

– Philipp Ellebracht, Schroders

Deutsche Pfandbriefbank, the government-owned real estate specialist, is among the lenders that say they have seen increased demand for financing in Germany’s smaller cities. “We expect such exposure to account for a growing proportion of our business,” said board member Bernhard Scholz.

“The big 10 cities remain in the focus but the desire of investors to achieve higher returns will flood the secondary cities with capital,” says Philipp Ellebracht, a property specialist at Schroders in Frankfurt.

Rises in residential property prices have also concerned German politicians, who have sought to cap rent rises in larger cities, a measure the Bundesbank opposes.

Yet despite fears of overheating, international investors are unlikely to be deterred. Matthias Danne, head of German real estate investor Deka Immobilien, said: “The German market is saturated, yes, but saturated also means stable.”