Bundesbank’s Dombret calms fears of rising property prices

While the European Central Bank was announcing plans to open the financial spigots to combat the threat of European deflation, across town in Frankfurt at the Bundesbank German financial regulators said they are studying tools that can be used to fight potential real-estate bubbles – in a pointed statement that the liquidity measures by the European Central Bank can only increase the risk of escalating asset prices.

Germany’s financial stability committee plans in coming months to recommend that the government create the legal framework for putting such tools to use, Bundesbank board member Andreas Dombret said in a recent speech in Berlin.

“Even if the risks on the property market seem slight at the moment, we still have to prepare for all eventualities,” he said. “The world has become a bit more dangerous for real-estate investors.”

The ECB said on January 22nd that it will buy €60 billion of bonds every month through September 2016 in a drive to put more cash into circulation and revive euro-area inflation. The measure was announced against opposition led by German officials in the Governing Council, who have long taken an anti-inflationary stand against the majority opinion of the Council members.

German house prices rose 5.1% in 2014, for the sharpest increase since 1993, according to researcher BulwienGesa. Domestic and international buyers, including private individuals and investment firms, are piling into German real estate as a way to earn higher returns amid record-low interest rates in fixed-income markets.

Consumers and banks should prepare for potential increases in interest rates, Dombret said. “Mortgage contracts should only be signed if borrowers can still pay them off when interest rates are higher,” he said.

The Swiss National Bank’s recent decision to remove its currency cap shows that property markets can become vulnerable if borrowers take out mortgages in foreign currencies, as has been the case in several eastern European markets, notably Poland. However, only about €2 billion of Germany’s approximately €1 trillion in mortgages are in Swiss francs, meaning that there’s no cause for concern, Dombret said.

Dombret repeated the Bundesbank’s assessment that there is no German property bubble, although home prices in cities such as Berlin, Hamburg and Frankfurt were overvalued by more than 20% as recently as 2013, by the Bundesbank’s own measure. None of the conditions of a bubble are present, he said. Price increases have already started to slow down, credit growth remains moderate and most banks have maintained strict lending standards, he said.

However, regulators will take a closer look at data that were presented in the Bundesbank’s annual financial stability review in November, suggesting some banks in large cities are offering mortgages covering more than the property’s appraised value, he cautioned.