February 20, 2017 / 11:01 AM / 6 months ago

Economy good, but homes in German cities overpriced, Bundesbank says

FRANKFURT, Feb 20 (Reuters) - 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 stimulus.

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 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 the capital 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 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 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.

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

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