German Bundesbank vice president Claudia Buch said in Dublin on Thursday the greatest risks to her country's financial system include banks holding overvalued real-estate assets as collateral for loans and the threat of an abrupt rise in interest rates from current ultra-low levels. She referred to the Irish experience of a housing crash.
“Credit-financed booms in real estate markets play a crucial role for the severity of financial crisis and the associate costs for society. I certainly do not need to remind an Irish audience of the implications of a bursting housing bubble,” Prof Buch said.
“Overall, indicators for the German real-estate market are sending mixed signals. It is hard to assess whether the market is moving into a territory where there is a risk of a credit-driven price bubble – or a self-reinforcing narrative – which might threaten financial stability.”
Still, German regulators are holding back from activating macro-prudential tools like the mortgage caps introduced in Ireland in 2015, as aggregate household debt sustainability "appears solid", while a Bundesbank survey on consumer expectations last year signalled that individuals weren't predicting "every increasing prices" over the medium term.
“Taking into account everything we know, our current assessment is that we will have to continue monitoring the real estate market very closely,” Prof Buch said.
“There is currently no need for regulatory intervention by activating sectoral macro-prudential tools. However, it would be premature to issue the all-clear signal for the real estate market.”
Asset prices
Prof Buch highlighted that asset prices also reflect current low interest rates and an expectation that this will remain the case “in the years to come”.
Unlike countries like Ireland and Spain, Germany was spared a property crash more than a decade ago during the global financial crisis. However, the country's banks were hit by a bubble that formed in the 1990s after German reunification in former East Germany.
“Tax incentives, subsidies, guarantees, subsidised loan programs - coupled with overly optimistic expectations regarding future economic developments - contributed to a build-up of excess supply in the real estate market,” she said.
