The EU Risk Council ESRB warns of overvaluations on the German real estate market and recommends stricter regulations for supervisors. The European Central Bank (ECB)-based body has warned that there is a rise in house prices across the board – both in cities and in rural areas. Estimates pointed to a "high and growing overvaluation" in Germany.
In their report, the ECB's risk monitors spoke of a sharp rise in prices, signs of loosening lending standards and a lack of data on real estate loans. The Council classified the risk for Germany as medium. The legal framework is only "partially appropriate and partially sufficient".
"Early warning system" for the financial markets
The European Systemic Risk Council (ESRB) was created in response to the global financial and economic crisis of 2007 to 2009 as part of a reorganization of banking and financial supervision in Europe. As an early warning system, it is intended to keep an eye on all financial markets and can issue warnings and recommendations. The body will work with banking, insurance and market supervisors.
Not only German real estate market affected
The EU Risk Council had examined the medium-term vulnerability of the residential real estate markets in the European Economic Area. All EU countries as well as Iceland, Liechtenstein and Norway were analyzed. The result shows that risks to financial stability from the real estate market have grown in some countries. House prices and overvaluations have mostly risen, while household debt is increasing in some countries.
Risk Council warnings were sent to Bulgaria, Croatia, Hungary, Slovakia and Liechtenstein. Recommendations went to Austria and Germany, which had already received warnings in 2016 and 2019 respectively. Even then, the EU Risk Council had recorded exaggerations on the German housing market. He now put the overvaluation at 19 to 23 percent in the first quarter of 2021. Among other things, the Risk Council recommended re-discussing the limits on the ratio of the loan amount to the market value of real estate.
BaFin is also keeping an eye on the situation
The financial regulator BaFin has already introduced stricter rules for financial institutions. It has decreed that Germany's banks must save up an additional capital buffer over the next twelve months as a precaution against possible setbacks, for example on the real estate market. An additional buffer is to be introduced on April 1, which specifically protects residential real estate loans.
The real estate market can have a strong impact on the financial system: banks can falter when real estate loans default on a large scale, as in the global financial crisis. The Deutsche Bundesbank has long warned against overvaluations of ten to 30 percent for residential real estate in Germany. The rise in prices for apartments and houses has recently accelerated. According to the Federal Statistical Office, real estate prices rose by an average of twelve percent in the third quarter of 2021 compared to the same quarter of the previous year. It was the largest price increase since the time series began in 2000.