Bundesbank alert over rapid property price rises

The Bundesbank has warned that a rapid rise in property prices in major German cities could be a sign of an urban property bubble.

In its monthly report yesterday, the bank warned of “possible overvaluation” in residential property in cities such as Berlin, Munich and Frankfurt.

While there are no signs of substantial exaggerations in the housing market as a whole, the bank’s analysis noted price rises in urban centres that are “difficult to justify based on fundamental factors”.

Euro zone fears, low interest rates and a booming German economy means property prices in cities have risen by 8.25 per cent in just three years, due to a “marked gap between property prices in urban and rural areas”.

The highest price rise has been in apartments, up more than a quarter in the period under study, generating fears about the sustainability of current prices.

“In attractive large cities, the upward deviations in this segment are as high as 20 per cent,” added the authors of the empirical study of prices in Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf.

The central bank has been cautious in the past to speak of a property bubble, saying Germany’s heterogeneous property market makes it difficult to make such sweeping statements.

In yesterday’s report, it repeats that its findings come with a considerable degree of uncertainty.

However, it says it cannot be ruled out that price spikes in urban areas will not spill out into the surrounding environs. It has already noted “clear signs of a dispersion from cities to their surrounding areas” which it suggests might be fuelled by “inflated expectations or speculation motives”.

The Bundesbank says it does not expect prices to ease in the short term: a severe shortfall in housing supply means that a burgeoning construction boom is not enough to meet the growing demand for bricks and mortar.

This high demand and lack of supply means the bank sees “no considerable macroeconomic risks at present” in the price spike. It also says the price rises are not being caused by increased borrowing, with the property mortgage market remaining “sluggish”.

However it warns that “possible price corrections could cause severe wealth losses among households”.