;Resize=(1200,627)&impolicy=perceptual&quality=medium&hash=6e925c1d4a276e263a9a1db8485b6f92dd553a4b7e839e775057828307a9e543 "Real estate boom: Bundesbank warns banks of excessive prices")
Real estate prices in Germany rose by 7.2 percent on average in the third quarter of 2021 compared to the previous year. This means that the inflation of residential real estate has even increased, says the Deutsche Bundesbank in its current financial stability report. Last year the prices rose by 6.7 percent. These steadily rising prices are slowly but surely leading to a problem. The Bundesbank estimates that Apartments and houses outside of big cities are now significantly overpriced. Depending on the region, the prices would be 10 to 30 percent above the fundamental value of the property.
As of now, this is annoying for homebuyers, as they have to dig deeper into their pockets than they actually need to. In the medium term, however, the Bundesbank sees this as a risk for banks if they overestimate the real value of a property. After all, the objects financed with a loan always serve as security for the bank. If a home buyer can no longer service his loan, the bank can, in the worst case, sell his house. But that only makes sense if the bank also redeems the purchase price.
Parallels to the financial crisis make central banks sensitive
This is precisely where the Bundesbank now sees the risk. She warns that if inflation persists, the European Central Bank (ECB) could at some point be forced to raise interest rates. Because most homebuyers have allowed today’s low interest rates to be locked in for at least ten years, banks cannot pass interest rate increases on to their customers. Conversely, higher interest rates would slow down the demand for real estate and, in the worst case, cause prices to fall more in the direction of their actual values - banks would then make losses.
The real estate crisis in the USA began 13 years ago with similar problems and later ended in a global financial crisis. Something like that is not to be feared in Germany, but central banks such as the Bundesbank have since responded very sensitively to all signs in this direction. This also applies to politics. In the coalition agreement between the SPD, the Greens and the FDP, there are suggestions on how to limit the maximum credit load of a citizen. The idea is, for example, that in the future only a certain percentage of the income may be used for a real estate loan. Whether such a regulation would be constitutional is still controversial. It would be an encroachment on the freedom of contract. The Bundesbank does not yet see any need for such interventions.
Why real estate prices are rising despite the corona crisis
The fact that the valuations of real estate and thus the prices of houses have risen so sharply in the past two years despite the Corona crisis is in turn due to this crisis. This had two effects on potential buyers: First, many employees had to switch to the home office and spend a lot of time at home. For many, the ceiling literally fell on their heads, which accelerated the desire for larger and own four walls.
Second, many Germans also have the money for it. After all, retailers and leisure facilities were closed for months in the Corona crisis. Many expenses were eliminated. Accordingly, the Germans either put their money in savings accounts – the savings rate increased significantly in 2020 – or they put it in shares, Gold, Cryptocurrencies or real estate. Almost all asset classes experienced an upturn in the Corona crisis.
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The greater demand for real estate is paired with better financial resources and the still low interest rates on real estate loans. Because the supply of apartments and houses is not growing fast enough at the same time, prices are rising.
If you have a House purchase have thought, the latest report from the Bundesbank shouldn’t prevent you from doing so. It should only serve as a reminder to you to properly assess the value of a potential home and to choose a loan on which you are not over-indebted. Experts recommend spending a maximum of a third of your net salary on this. This may limit your leeway, especially in large cities and metropolitan areas, but it is still better than not being able to pay the loan later.
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