Risk of an overheating housing market calls for proactive measures

In large parts of Germany, real estate prices have only headed in one direction for the sixth year in succession, namely upwards. And not only that, the pace of price increases accelerated even further last year. According to figures of the Association of German Pfandbrief Banks, prices for residential property in Germany had already risen by more than six percent by mid-2016 compared with the summer of 2015. A point worth noting – this is the nationwide average for price developments as well as the average across the various real estate types, such as detached houses and appartments. In some structurally weak areas prices are actually in decline, with some houses still unable to find a buyer even after several months. This means that the uptrend in prices is all the greater in the majority of business centres. For owner-occupied appartments in the major cities, the price gain has already reached the double-digit region over a 12 month horizon.

The risk of some regional housing markets overheating has therefore risen noticeably, even if we do not expect a significant correction at this juncture. On the other hand though, real estate prices are becoming increasingly removed from levels which would be justified in terms of fundamentals. After decades of just drifting along, the uptrend in prices in Germany is currently being driven by two quite unhealthy forces: First, investments have been hit by the persistently low interest rates and second, the number of international trouble spots has risen noticeably. Worries over the European Union’s ability to stick together have also boosted investments in real assets.

Even if the moderate debt of private households and the comparatively tight lending requirements in Germany by international standards are having a risk-reducing impact, we still see good reason to introduce a set of rules that would apply if the Bundesbank were to confirm that the German housing market was overheating. In the event of crisis, immediate action is required, with laborious statutory processes possibly exacerbating the situation even further. One and a half years ago, the Financial Stability Committee had already declared the need for new instruments to regulate the purchase of residential property. Based on the instruments now being presented by the committee, the banking supervisor BaFin should be able to control new business with real estate if required. Fortunately, these instruments do not contain additional reporting obligations for credit institutions and these should also be avoided in the future.

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