The Bundesbank warns of the growing dangers in the German housing market. In 2020, residential property prices rose sharply again, averaging 6.7%, and a further increase is expected in many cases, the Bundesbank said in its latest financial stability report. Residential property prices are now 10 to 30% above the justified level. “This is increasingly the case outside metropolitan areas,” said Bundesbank Vice President Claudia Buch.
From the point of view of the Bundesbank, rising house prices may become critical for financial stability if more loans are made with very relaxed lending standards and if prices are expected to continue to rise. If prices are corrected, more credit could come under pressure. According to a survey, nearly 90% of households expect house prices to continue to rise. According to the Bundesbank, a high proportion of long-term loans and investments makes the financial system vulnerable to risks resulting from changes in interest rates. About half of bank loans for residential real estate have a fixed interest period of more than ten years.
Overall, the financial system performed well during the pandemic. The dreaded wave of bankruptcies in the corporate sector did not materialize. “The broad government measures have protected the financial sector from losses. But vulnerabilities continue to accumulate – in connection with negative macroeconomic developments and in particular in the real estate market,” said Buch. “The pandemic is not over, there are downside risks to the real economy,” she warned.
Bundesbank board member responsible for banking supervision, Joachim Wuermeling, said: “The German financial system is currently resilient enough to cope well with a slowdown in economic development. Banks could use the capital buffers that have been built up to prevent possible restrictions on lending. At the same time, Wuermeling warned that financial institutions should now arm themselves if the interest rate environment changes. “If inflation rises significantly higher or longer than expected, interest rates in financial markets could rise significantly. This would lead to market corrections and currency losses,” Buch warned.
In the short term, the rise in interest rates would have an impact on the banking sector in particular: the costs of refinancing institutions would increase immediately – revenues, on the other hand, would increase only slowly. Buch stressed: “Now is the right time to prevent future risks.”