Germany is facing a residential property bubble after property prices in 125 cities increased by an average of 6.25 per cent in 2013 – the highest annual rise in more than ten years.
According to Bundesbank, a lack of supply as well as increasing international demand for German property due to its perceived reputation as a safe investment, could cause long-term problems for the market.
“The prices of residential properties have increased more than the economic and demographic fundamentals suggest,” the Bundesbank said in its monthly report on the German economy. “This is especially true for urban real estate markets, where properties are overpriced between 10 per cent and 20 per cent. In big cities, the house prices on average are probably overpriced by 25 per cent.”
And according to Bundesbank board member Andreas Dombret, while prices in the country currently remain manageable, this may not be the case for long. “[A bubble] can’t be completely ruled out in the case of a long low-interest phase with such high liquidity,” he said.
However, in spite of the threat posed by a potential property bubble, Germany’s central bank has insisted that a potential bubble does not represent an economic risk to Europe’s largest economy as there was no indication that borrowing was increasing to keep pace with prices.
“Mortgage loans to private households rose moderately by 2.25 per cent, after 2 per cent in 2012,” the Bundesbank report continued, noting that banks had tightened up their mortgage guidelines.