Houses and apartments in Germany are becoming more and more overpriced, according to a new analysis by the Bundesbank. The risk of a real estate bubble is growing, and not only in Germany’s major cities. 

Germany’s housing market increasingly overheated

The trend towards inflated real estate prices in Germany intensified over the past year, the Bundesbank said. “The overvaluations in residential real estate increased,” the German bank wrote in its February report. “According to the latest estimates, real estate prices in cities in 2021 were between 15 percent and 40 percent above the price indicated by socio-demographic and economic fundamentals.” 

This is a significant increase on 2020, when the overvaluation range was between 15 and 30 percent. According to the Association of German Pfandbrief Banks, whose figures the Bundesbank used for its report, the cost of buying a house in Germany rose by 11,3 percent last year, having already risen 7,5 percent the year before. 

Although the report concedes that there is still a great deal of uncertainty on the German housing market in the aftermath of the coronavirus pandemic, the Bundesbank does not believe that the problem will be alleviated in the coming year. On the contrary, the report states that residential real estate is likely to get more expensive in the coming year - even in areas outside of major cities - driven by high demand and ongoing supply bottlenecks. 

Bundesbank and EU call for mortgages to be better regulated

The Bundesbank has been warning of overvaluations on the real estate market in Germany for many years. The EU Risk Council ESRB also recently issued a warning in response to strong price increases across the bloc, and urged countries to do more to combat surging prices, for instance better regulating mortgages by introducing an upper limit of the loan to value ratio. 

The financial regulator BAFIN has already introduced stricter rules for financial institutions, decreeing that banks in Germany must save up a capital buffer over the next 12 months as a precautionary measure. From April 1, an additional buffer will also be introduced, specifically to cushion residential real estate loans.