Flats in German cities 'overvalued by 20pc' as construction lags

Apartments in Germany's largest cities may be overvalued by as much as 20 per cent as home demand outpaces construction, the Bundesbank said.

Apartment prices in parts of Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Dusseldorf have risen by more than 25 per cent on average since 2010, the central bank said in its October report. Prices in areas around the cities may be climbing due in part to speculation.

"The price pressure on residential property markets will probably not ease up in the near term," the Bundesbank said. "However, it's not very likely that the current price dynamics on the property market are already leading to significant macroeconomic risks."

German home prices are rising as investors seek a safe place to put their money. Low interest rates are encouraging investors to seek returns outside of bond markets and making it easier for buyers to finance their purchases.

As a whole, the German housing market is appreciating in line with income and isn't overvalued, the central bank said.

Prices in Germany's cities beyond the biggest seven may be about 5 per cent to 10 per cent above where they should be, based on long-term demographic and economic indicators, the Bundesbank said.

German home prices rose by the most in a year in the second quarter, according to an index published by the VDP Association of German Pfandbriefbanks on August 15. Prices are rising most sharply for newly built apartments in the centres of big cities, the Bundesbank said.

Construction hasn't kept up with demand, which means that prices will probably continue to rise, the central bank said.

Developers will build enough apartments if renting becomes more profitable, it said.

In response to rising prices, German politicians have introduced rules including tightened rent controls and banning luxury renovations to keep housing affordable.

The German parliament in December agreed on steps to cap rents for existing tenants at 15 per cent over three years.

"Against this backdrop, capping rents is counterproductive," the Bundesbank said. "Market-related incentives for investments must remain in place."

Germany issued permits for the construction of 124,900 homes in the first half, 9.6 per cent more than a year earlier, said the Federal Statistics Office.