“We see a slowdown in residential property price growth, but it doesn’t mean that the general dynamic has reversed,” Claudia Buch, vice president of the Bundesbank, told CNBC’s Jomana Persic.
“So our market is still overvalued,” she said.
The report notes the strong rise in German residential property prices from 2010 to mid-2022 and says overvaluation in the market has increased, ranging between 15% and 40% in both German cities and towns and the country as a whole in 2021.
Some analysts, including those at Deutsche Bank, had predicted a sharp decline in 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 trough, according to forecasts by Jochen Moppert, a macroeconomic analyst at the Deutsche Bank.
Buch said the central bank’s concern was to what extent the overvaluation was driven by the loosening of credit standards by the very rapid growth in residential mortgages.
“There we also see a slowdown,” she said. “So we don’t currently believe that additional measures are being taken to slow the buildup of vulnerabilities in this part of the market, but we do think we need to continue to monitor the market because we know that private households are highly exposed to mortgage loans, so that is the largest component of private household debt.”
She continued that the German market has a high share of fixed-rate mortgages, so households are less exposed to higher interest rates than in some other countries.
“Of course the risk doesn’t go away, it’s still in the system, but that exposure to interest rate risk is very much with the financial sector, and the banks that did that lending in terms of mortgages.”
The Bundesbank’s 2022 Financial Stability Report highlights other issues, including deteriorating macroeconomic conditions and a slowdown in German economic activity, increases in energy prices, and declining real disposable income.
He describes the German economy as being at a “turning point” after price corrections in the financial markets, which led to a reduction in the value of stock portfolios. It also points to increased collateral requirements in the futures markets and increased risks from corporate loans.
It says there has been no fundamental reassessment of credit risk in German banks yet, but says its financial system is “vulnerable to adverse developments”.
“The message is very clear, we need a resilient financial system, we need to continue to build resilience over the next period of time,” Buch told CNBC.
additional Reporting by Hannah Ward Glinton