According to the Bundesbank, a high proportion of long-term loans and investments makes the financial system susceptible to risks that can result from a change in interest rates.

Skyline Berlin Mitte

Although prices in German metropolises such as Berlin have already reached peak values, almost 90 percent of households expect real estate prices to continue to rise.

(Photo: Paul Langrock)

Frankfurt The Bundesbank warns of increasing dangers on the German real estate market. In 2020, the prices for residential real estate rose sharply again, with an average of 6.7 percent, and prices are expected to continue to rise in many cases. The Bundesbank announced this in its report on financial stability published on Thursday.

The prices of residential real estate are now overvalued by ten to 30 percent. “This is increasingly the case outside of the metropolitan areas as well,” said Bundesbank Vice President Claudia Buch according to the speech.

The effects of price adjustments could be underestimated. “Now is the right time to prevent future risks,” said Buch.

From the Bundesbank’s point of view, rising real estate prices can be critical for financial stability if more loans are granted with greatly relaxed lending standards and rising prices are expected.

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According to a survey, almost 90 percent of households are expecting real estate prices to continue to rise. According to the Bundesbank, a high proportion of long-term loans and investments makes the financial system vulnerable to risks that arise from a change in interest rates.

Fixed interest period of more than ten years

Around half of the bank loans for residential property have a fixed interest period of more than ten years.

The European Central Bank (ECB) also recently pointed out increasing risks in the housing market in its financial stability report. The ECB explained that the risk of price corrections has increased, especially in residential property markets in countries where valuations were already higher before the crisis.

The German central bank also commented on a completely different topic, also relating to the real estate market, in its financial stability report.

All clear for links to Evergrande

There was an all-clear regarding the direct claims of German banks, insurers and funds against the ailing Chinese real estate developer China Evergrande Group. They are comparatively small.

Evergrande had become the focus of global financial markets in September. The company is heavily indebted and struggling to service claims from banks, suppliers and bondholders on time.

According to the Bundesbank, the direct financial links between other European banks also appear to be manageable – with the exception of banks from the United Kingdom and Switzerland. Indirect effects could therefore result from the networking of German financial intermediaries with credit institutions in both countries, the report said.

Low loan defaults in the pandemic are not a guideline for the future

On another point, the Bundesbank warned the German banks against viewing the low loan defaults over the past two years in connection with the Covid 19 pandemic as a guideline for the future.

It was government support for businesses and households during the health crisis that saved the financial system from losses. The banks were spared a serious examination.

“During the pandemic, the connection between the macroeconomic situation and credit risks has become looser,” writes the Bundesbank. “In future recessions, however, credit risks could increase more sharply. The experience of the past years should therefore not be carried forward into the future. “

More: Austria’s central bank: Risks from residential property loans are increasing

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