- Claudia Buch, vice president of the Bundesbank, told CNBC there had not been a reversal of the "overall dynamic" in the housing market so there would still be overvaluations.
- German homeowners are less vulnerable to interest rate rises than some elsewhere due to the high proportion of fixed-rate mortgages.
- The central bank's Financial Stability Review for 2022 says the German economy is at a "turning point" following price corrections in financial markets.
Germany's central bank is predicting a slowdown but no significant correction in the country's property market despite warnings of overvaluation, according to a report published Thursday.
Claudia Buch, vice president of the Bundesbank, told CNBC's Joumanna Bercetche: "We do see a slowdown in the price growth for residential real estate, but it's not that the overall dynamic has reversed."
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"So we still have overvaluations in the market," she said.
The report notes the strong rise in German residential property prices from 2010 to mid-2022 and says overvaluations in the market have increased, ranging between 15% and 40% in both German cities and towns and the country as a whole in 2021.
Some analysts, including at Deutsche Bank, have forecast a sharp decline for the sector. House prices have already declined around 5% since March, according to Deutsche Bank data, and they will drop between 20% and 25% in total from peak to trough, forecasts Jochen Moebert, a macroeconomic analyst at the German lender.
Buch said the central bank's concern was the extent to which overvaluation was being driven by the loosening of credit standards by a very fast growth in credit residential mortgages.
"There we also see a slowdown," she said. "So we don't currently think that additional measures are taken to slow down the build-up of vulnerabilities in this market segment, but we do think we need to keep monitoring the market because we know that private households are very much exposed to mortgage loans, so that's the biggest component in private household debt."
The German market has a high share of fixed-rate mortgages so households are less vulnerable to rising interest rates than in some other countries, she continued.
"Of course the risk doesn't disappear, it's still in the system, but this exposure to interest rate risk is largely with the financial sector, the banks who've done that lending with regard to mortgages."
The Bundesbank's Financial Stability Review for 2022 highlights other issues, including deteriorating macroeconomic conditions and the slowdown in German economic activity, increases in energy prices and the fall in real disposable income.
It describes the German economy as at a "turning point" following price corrections in financial markets, which have led to write-downs on securities portfolios. It also cites increased collateral requirements in futures markets and increased risks from corporate loans.
It says there has been no fundamental reassessment of credit risk in German banks so far but says its financial system is "vulnerable to adverse developments."
"The message is very clear, we need a resilient financial system, we need to keep building up resilience over the next period of time," Buch told CNBC.
Additional reporting by Hannah Ward-Glenton