The German central bank sees a slowdown in the property market but no significant correction going forward

Germany’s central bank predicts a slowdown but no significant correction in the country’s property market despite warnings of overvaluation, according to a report published Thursday.

Claudia Buch, vice president of the Bundesbank, told CNBC’s Joumanna Bercetche: “We did see a slowdown in price growth for residential real estate, but not because the overall dynamic has reversed.”

“So we are still overvaluation in the market,” he said.

The report notes strong increases in German residential property prices from 2010 to mid-2022 and says overvaluation in the market has increased, ranging between 15% and 40% in German cities and the country as a whole in 2021.

Some analysts, including at Deutsche Bank, expect a sharp decline for the sector. House prices have fallen by around 5% since March, according to Deutsche Bank data, and they will fall between 20% and 25% in total from peak to trough, forecast Jochen Moebert, a macroeconomic analyst at the German lender.

Buch said the central bank’s concern was the extent to which overvaluation was driven by loosening credit standards by the very rapid growth in residential mortgage credit.

“There we also see a slowdown,” he said. “So right now we don’t think that additional action is being taken to slow the buildup of vulnerabilities in this market segment, but we do think we need to continue to monitor the market because we know that private households are very vulnerable to mortgage lending, so that’s the largest component in household debt private.”

The German market has a high share of fixed rate mortgages so households are less vulnerable to rising interest rates than in some other countries, he continued.

“Obviously the risk isn’t going away, it’s still in the system, but this exposure to interest rate risk is mostly in the financial sector, the banks that have made loans in conjunction with mortgages.”

The Bundesbank Financial Stability Review for 2022 highlights other issues, including worsening macroeconomic conditions and a slowdown in German economic activity, rising energy prices and falling real incomes.

It describes the German economy as being at a “turning point” following price corrections in financial markets, which have led to a decline in the value of securities portfolios. It also cites increased collateral requirements in futures markets and increased risk from corporate loans.

It said there had been no fundamental reassessment of credit risk at German banks so far but said the financial system was “vulnerable to adverse developments.”

“The message was very clear, we need a resilient financial system, we need to continue to build resilience over the next period of time,” Buch told CNBC.

Addition reported by Hannah Ward-Glenton