Bundesbank sees property market slowdown but not a correction ahead

German central bank sees property market slowdown but no significant correction ahead

Germany’s central bank is predicting 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 see a slowdown in price growth for residential real estate, but not that the overall dynamic has reversed.”

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

Some analysts, including Deutsche Bank, predicted a sharp decline for the sector. House prices have already fallen about 5% since March, according to Deutsche Bank data, and will fall between 20% and 25% in total from peak to depression, forecasts Jochen Moebert, a macroeconomic analyst at the German lender.

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

“That’s where we also see a slowdown,” he said. “So now we don’t think that additional measures have been taken to slow down the increase in vulnerability in this market segment, but we think that we need to continue to monitor the market because we know that private homes are very exposed to mortgage loans, so this is the largest component of private household debt.”

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

“Of course the risk does not disappear, it is still in the system, but this exposure to interest rate risk is largely with the financial sector, the banks that have made loans with regard to mortgages.”

The Bundesbank’s Financial Stability Review for 2022 highlights other issues, such as the deterioration of macroeconomic conditions and the slowdown in German economic activity, the rise in energy prices and the fall in real disposable income.

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He described the German economy as at a “turning point” after price corrections in financial markets, which led to write-downs on securities portfolios. He also cited increased collateral requirements in futures markets and increased risk from corporate loans.

He says that there is no fundamental reassessment of credit risk in German banks so far but he says his financial system is “vulnerable to negative developments.”

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

Other reporting by Hannah Ward-Glenton


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