German homes are still overvalued despite price drop

FRANKFURT (Reuters) – German homes are still overvalued despite a fall in prices last year as the cost of mortgages spiked, the country’s central bank said on Monday.

Germany’s decade-long property boom has unravelled since a sudden bout of inflation forced the European Central Bank (ECB) to hike interest rates, while the domestic economy was hit by more expensive energy imports and sluggish exports.

The price of owner-occupied residential property fell by just over 4% last year according to industry data. The German statistics office put the decline at 8.9% for the first nine months of the year.

Yet the Bundesbank, the ECB’s biggest shareholder, estimated that prices were still 15-20% above where they should be based on Germany’s current demographic and economic situation.

“The overvaluation may not have been fully corrected yet despite a considerable reduction,” the Bundesbank said in its monthly report. “This continues to pose a certain risk of price corrections.”

It said the price-to-income ratio was 20% higher than its reference value while the long-term relationship between property prices, interest rates and incomes showed an overvaluation of between 10% and 15%.

For flats in German cities, the relationship between purchase price and rent lay 20% above its long-term average, the Bundesbank said.

As people were less able to afford to buy, they turned to renting.

Renting a city flat was 5.5% dearer according to Bulwiengesa, a property consultant and analysis firm. New lease contracts were 6.3% more expensive for multi-family homes, according to data from Germany’s association of Pfandbrief banks.

The ECB is widely expected to start cutting rates this year and even Bundesbank President Joachim Nagel, an early supporter of rate hikes, said the “greedy beast” of inflation had now been tamed.