overvaluation increases
Bundesbank: Real estate prices significantly excessive
2/21/2022, 3:49 p.m
According to estimates by the Bundesbank, the prices for residential real estate are up to 40 percent higher than the price that is justified. Reasons are the continuing high demand and the increased construction costs. The ECB and BAFIN are also increasingly concerned.
According to a Bundesbank analysis, the trend towards excessive real estate prices in German cities has intensified in the past year. “The overvaluations in residential real estate increased,” writes the Bundesbank in its monthly report. “According to the latest estimates, real estate prices in cities in 2021 were between 15 percent and 40 percent above the price indicated by socio-demographic and economic fundamentals.”
In 2020, the range was still 15 to 30 percent. However, the Bundesbank emphasizes that the assessment of residential real estate prices is currently subject to a particularly high degree of uncertainty. The reasons for this are the partly still uncertain and longer-lasting effects of the corona pandemic – for example on disposable income – as well as the extraordinarily strong increases in construction prices.
Material bottlenecks drive up prices
According to estimates by the Bundesbank, residential real estate outside of urban areas is also likely to have become much more expensive in the past year. The experts justify this with the continued high demand and supply bottlenecks, which would have led to significantly higher material costs for new residential construction. At the same time, the supply of housing has also increased significantly.
The Bundesbank cites several prices to support its findings. Accordingly, according to figures from the Association of German Pfandbrief Banks, prices for residential property increased by 11.3 percent last year (previous year: 7.5 percent). Calculations based on information from the data provider Bulwiengesa for 127 German cities would have resulted in a price increase of seven percent. Compared to the two previous years, in which the growth rates had slowed down, this was again a somewhat stronger increase.
BAFIN calls for the banks to take precautions
The Bundesbank has been warning of overvaluations on the real estate market for years. The strong price increases in Germany and other European countries recently also alarmed the EU Risk Council ESRB. In this country, there is an increase in house prices across the board, warned the committee based at the European Central Bank. Estimates pointed to a “high and growing overvaluation”. Germany should do more against the price surge. The EU Risk Council recommended introducing an upper limit for the ratio of loan amount to property value in real estate financing.
The financial regulator BAFIN has already introduced stricter rules for financial institutions. It has decreed that Germany’s banks must save up an additional capital buffer over the next twelve months as a precaution against possible setbacks, for example on the real estate market. An additional buffer is to be introduced on April 1, which specifically protects residential real estate loans.