Apartments in Germany’s largest cities may be overvalued by as much as 20 percent as home demand outpaces construction, the Bundesbank said.
Apartment prices in parts of Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Dusseldorf have risen by more than 25 percent on average since 2010, the central bank said in its October report. Prices in areas around those cities may be climbing due in part to speculation.
“The price pressure on residential property markets will probably not ease up in the near term,” the Bundesbank said. “However, it’s not very likely that the current price dynamics on the property market are already leading to significant macroeconomic risks.”
German home prices are rising as investors seek a safe place to put their money. Low interest rates are encouraging investors to seek returns outside of bond markets and making it easier for buyers to finance their purchases.
As a whole, the German housing market is appreciating in line with income and isn’t overvalued, the central bank said.
Prices in Germany’s cities beyond the biggest seven may be about 5 percent to 10 percent above where they should be, based on long-term demographic and economic indicators, the Bundesbank said.
German home prices rose by the most in a year in the second quarter, according to an index published by the VDP Association of German Pfandbriefbanks on Aug. 15. Prices are rising most sharply for newly built apartments in the centers of big cities, according to the Bundesbank.
Construction hasn’t kept up with demand, which means that prices will probably continue to rise, the central bank said. Developers will build enough apartments if renting becomes more profitable, it said.
In response to rising prices, German politicians have introduced rules including tightened rent controls and banning luxury renovations to keep housing affordable. The German parliament in December agreed on steps to cap rents for existing tenants at 15 percent over three years.
“Against this backdrop, capping rents is counter-productive,” the Bundesbank said. “Market-related incentives for investments must remain in place.”
Germany issued permits for the construction of 124,900 homes in the first half, 9.6 percent more than a year earlier, according to the Federal Statistics Office.