German home prices may be in danger of overheating in some regions, even though the nationwide risk is low, the Bundesbank said.
Banks are increasing their lending as demand for residential property accelerates, the German central bank said today in its 2012 Financial Stability Review.
“The risk for price exaggerations for Germany overall remains low from today’s perspective,” the Bundesbank said. “However, it can’t be ruled out in regional sub-markets.” The bank didn't identify the areas that are most vulnerable.
Germany’s residential property boom is being fueled in part by low interest rates and a lack of investment alternatives. Low rates have encouraged private buyers to take out mortgages and prompted large institutions to favor real estate over the bonds that they typically purchase.
Investors bought 6.4 billion euros ($8.2 billion) of German residential property in the first half, compared with 5.8 billion euros in all of 2011, according to data compiled by Jones Lang LaSalle Inc.
Banks that finance commercial properties in German regions with shrinking populations and weak job markets may be at risk, the Bundesbank said. There is oversupply in the German commercial market and demand is climbing slowly, it said.
“Commercial property markets could, due to their volatility and heterogeneity, pose a risk to financial institutions that act as creditors in this segment,” it said.
German banks’ overall commercial property exposure isn’t considered a threat. The lending standards of German banks remain strict, as measured by a loan-to-value ratio of as much as 60 percent at almost half of Germany’s commercial lenders, it said.
Increased property lending by insurers doesn’t pose systemic dangers, although small insurers with little experience in the business may face some risks, the Bundesbank said.
German residential price gains, at 2.7 percent in 2011, are moderate and in line with fundamental data, the Bundesbank said. Economic factors, such as rising income, may justify further increases. In the long term, “unfavorable” demographic developments may damp demand for homes even as household growth is delaying this effect.
In some large cities, extraordinary factors such as low interest rates and a “difficult investing climate” are driving demand. Foreign investors who are seeking a haven from Europe’s sovereign-debt crisis are pushing prices up, it said.
German home prices are being closely watched and, if necessary, regulators can intervene to counter risks to the financial system, according to the central bank.
German lenders with exposure to regions in danger of overheating may be taking on risks that aren’t covered by their capital reserves. “As a result, the resilience of banks, as measured by regulatory capital-reserve indicators, may be overestimated,” the Bundesbank said.
Dangers are growing as floating-rate mortgages become more common in some urban areas. “This development carries risks, if the borrowers are confronted by rising costs after an unexpected increase in interest rates,” the Bundesbank said. “Especially in view of the currently low interest rates, there is the danger that borrowers are underestimating the risks.”
The country’s lenders are conservative by international standards with mortgage debt equivalent to 3 percent of Germans’ disposable income. “A destabilizing correlation between prices and lending has not yet set in,” it said.