FRANKFURT Feb 20 Homes in large German cities
are between 15 and 30 percent overpriced, the Bundesbank said on
Monday, in a message that is likely to stoke further fears in
Europe's strongest economy about the side-effects of monetary
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 percent 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
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 the capital Berlin, a trend that led to
rapidly increasing prices because the higher demand could not be
Residential property prices in German cities rose by 8
percent last year after increasing by 6.75 percent on average in
each of the previous six years, according to Bundesbank
calculations based on data from consultancy company Bulwiengesa.
ECONOMY IN GOOD SHAPE
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
"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
But the bank said a large U.S. fiscal stimulus as promised
by Washington could lead to a general rise in prices globally
and fuel inflation rates in Europe and Germany.
Inflation in Germany picked up further in January to 1.9
percent from 1.7 percent in December, hitting the highest level
in three-and-a-half years and touching the European Central
Bank's target for price stability of just under 2 percent.
Jens Weidmann, the powerful president of the Bundesbank and
a member of the ECB's rate-setting body, has argued recently the
increase in inflation should be countered by exiting step by
step from the ECB's unprecedented monetary stimulus.
However, ECB President Mario Draghi and other members of the
central bank's Governing Council want to see more evidence of a
sustained raise of the inflation rate before winding down the
bank's 2.3 trillion euros ($2.44 trillion) stimulus.
The ECB also has to be concerned with the euro zone as a
whole and not just individual members like Germany, albeit that
it is the most powerful.
The ECB's governing council will decide on March 9 on its
next steps, but most economists expect Draghi to sit on his
hands, waiting to see if the recent price increase, mainly due
to higher oil prices, persist.
($1 = 0.9411 euros)
(Editing by Jeremy Gaunt)