German House Prices 10% Overvalued

House prices are 10% higher than they should be according to a ‘fair value’ estimate according to German lender Commerzbank.

The biggest price gains have happened in the last three years when house prices have risen by an estimated 4.5% annually.

Fears that perpetually low interest rates could render pensions inadequate are seen as a major cause in the increased demand for housing which has become an alternative vehicle for saving for old age.

Unlike other periods of house price growth in Germany, such as happened at the end of the 1970s and end of the 1980s, the most recent spurt has occurred without a correspondingly rise in jobs, wages and GDP.

The fact the house price bubble has not come on the back of increasing incomes means it is more vulnerable to a petering out and readjusting back down, argues Commerzbank’s Dr. Marco Wagner.

A rise in interest rates would spark the beginning of the end for house price rises in Germany by making financing more expensive, however, with the ECB on hold for the foreseeable future and increased political risk magnifying their caution, this is unlikely to happen for several years.

This will add to the growing list of displeasure regarding ECB policy by some German politicians who argue the ECB's policies are not reflective of economic reality in Germany.

Wagner is however not concerned about the prospects of a financial crisis should the bubble burst as household debt remains relatively modest.

Most mortgage loans in Germany are fixed for a 5-year term so a rise in interest rates would take a long time to filter through.

As such although housing is overpriced in Germany it does not pose a major systemic financial risk.