Central Bank of Germany, the economy of which is the largest in Europe, saw the threat of a banking “bubble” by the residential real estate market. He reported this in his review of financial stability for 2021.
According to the Central Bank of Germany, the banks of the country should prepare for risks in the residential real estate market due to price increases. According to the financial regulator, in 2020, housing prices in the country increased sharply, an average of 6.7 percent. At the same time, the Central Bank records the overestimation of prices in comparison with the real estate value. Thus, prices were overestimated by 10-30 percent.
In turn, the banks increased the volume of loans issued for the purchase of housing, in the third quarter of 2021 the volume of issued loans increased by 7.2 percent compared to the same period of 2020, according to the Central Bank. In connection with the “inflated” prices for real estate, the regulator fears that in the future, the expected drop in housing prices may adversely affect the state of banks, given that the cost of collateral on issued by banks loans will also be overestimated.
The financial regulator also noted that from the beginning of the pandemic in the country declined the indicator of the counter-cycle buffer of banks – the mechanism that protects the banking sector from threats during the period of excessive lending to lending through higher requirements. The current mechanism does not take into account the growing housing prices, recalled the Central Bank, and banks may not be enough, if the loans begin to depreciate. “The high proportion of long-term loans makes the banking system vulnerable. For example, about half of bank loans for residential real estate have a fixed interest rate for more than ten years,” the review says.
Problems in the banking sector is not the only thing that worries the power of Germany. So, the index of the business climate among German enterprises falls the fifth month in a row. Business loses optimism and faith in the growth of the economy due to problems with deliveries in the manufacturing industry and a new burst of coronavirus diseases. The survey also showed that company executives are less satisfied with their current position, and their expectations for the first half of 2022 have become more pessimistic.