Central Bank says German Property Market will slow, but no Significant Correction is Expected

The German central bank is predicting a slowdown in the country's property market, but no significant correction, according to a report published Thursday. This is despite warnings of overvaluation.

Claudia Buch, vice president of the Bundesbank, told CNBC’s Joumanna Bercetche that the overall dynamic of the housing market has not reversed, despite a slowdown in price growth.

"There are still some overvalued assets in the market," she said.

The report found that German residential property prices have increased significantly from 2010 to mid-2022, and that overvaluations in the market have increased in recent years, ranging from 15% to 40% in both German cities and towns and the country as a whole in 2021.

Some analysts are forecasting a sharp decline for the housing sector. House prices have already declined by around 5% since March, and are expected to fall by a further 20-25% from their peak to trough, according to Deutsche Bank analyst Jochen Moebert.

Buch said that the central bank was worried about how much the increase in value was due to the relaxed standards for credit and mortgages.

"We're seeing a slowdown in this market segment," she said. "We don't think that additional measures are needed to slow down the build-up of vulnerabilities at this time, but we do think we need to keep monitoring the market because we know that private households are very much exposed to mortgage loans, which is the biggest component of private household debt."

The German mortgage market is dominated by fixed-rate loans, which makes households less vulnerable to rising interest rates than in other countries.

"The risk of interest rate hikes still exists, but it is largely borne by the financial sector - the banks who have lent money for mortgages."

The Bundesbank's Financial Stability Review for 2022 highlights other issues that could impact the stability of the German economy, including deteriorating macroeconomic conditions, a slowdown in economic activity, increases in energy prices, and a decline in real disposable income.

The German economy is at a turning point, with prices correcting in financial markets and leading to write-downs on securities portfolios. Increased collateral requirements in futures markets and increased risks from corporate loans are also contributing to the shift.

The ECB has warned that German banks have not yet undertaken a fundamental reassessment of credit risk, leaving the financial system vulnerable to adverse developments.

Buch said that the message is very clear: we need a resilient financial system, and we need to keep building up resilience over the next period of time.