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Homes in large German cities are between 15 and 30 per cent overpriced, the Bundesbank says.

The German economy will stay on a strong footing in the coming months thanks to high industrial and construction activity, the central bank said, but it warned this could not fully account for the surge in residential property prices.

“According to current estimates, there were price overshoots of between 15 and 30 per cent in the cities last year,” the German central bank said in its monthly report. “The deviations in prices were particularly pronounced in the case of owner-occupied apartments in the big cities.”

Germans have been sceptical of the European Central Bank’s policy mix of sub-zero rates and aggressive bond purchases, fearing it would eat into returns on their savings and inflate a property bubble.

In recent years, many Germans, who traditionally are more likely to rent than buy a home, put their money into the property market to benefit from the low interest rates and put their savings to work.

At the same time more people moved to bigger cities such as Munich, Frankfurt and Berlin, a trend that led to rapidly increasing prices because the higher demand could not be met.

Residential property prices in German cities rose by eight per cent last year after increasing by 6.75 per cent on average in each of the previous six years, according to Bundesbank calculations based on data from consultancy company Bulwiengesa.

The central bank said the German economy was in good shape and should run even better in the future, as the construction sector is buoyant, many factories run at full capacity and companies invest more.

Export activity should also benefit from strong demand, the Bundesbank said.

“Improvements in labour market conditions, favourable income prospects for workers and a good consumption climate let us expect a continuation of strong consumer spending, even if the higher inflation rate limits the scope for spending”, the Bundesbank said.

 
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