Germany's financial watchdogs are keeping a close eye on possible asset bubbles stemming from record-low interest rates and the European Central Bank's aggressive foray into quantitative easing.
"With interest rates so low, you are looking at potential asset bubbles with or without QE," says Andreas Dombret, a Bundesbank executive board member who oversees domestic banking.
The biggest concern is the housing market, which accounts for 40 per cent of all bank lending. "It's a big gorilla out there, so you have to watch it very, very carefully," Mr. Dombret told The Globe and Mail.
The Bundesbank can't do anything about the low rates, because monetary policy is made by the ECB. However, the German authorities do have the tools to take the air out of an inflating bubble, including tightening credit standards. So far, that hasn't been necessary.
Housing prices in Germany moved sideways for a decade, avoiding the explosive bubbles that did so much damage in Ireland and Spain. But in the past five years, residential prices in the larger cities have been rising steadily. And this trend has spread to surrounding suburbs, where prices are up 50 to 60 per cent in some places since 2010.
But officials have not seen a significant increase in lending volumes or a decline in credit standards, two signals of a bubble at work.
"From what we can see, the loan to value [ratios] remain roughly the same," Mr. Dombret said. "Which gives us the comfort that for the time being, this is not what you would call a bubble."
Prices have climbed into nosebleed territory in one major market, Berlin. But that particular spike is related to an influx of foreign money, much like property markets in Manhattan, N.Y., and London. Property deals in other centres still appear to be governed largely by fundamentals.
Across Germany, wages have increased, employment is high and demand healthy. "So there is an economic foundation supporting higher prices," Mr. Dombret said.
He and other German monetary officials have staunchly opposed massive pump-priming, arguing that such extraordinary liquidity measures should only be deployed in extraordinary circumstances. And unlike the euro zone's suffering smaller economies, Germany has been doing just fine, with rising consumer demand, improving business confidence, strong exports and modest growth.
But a majority of members on the ECB's governing council voted for the quantitative easing and the Bundesbank has to live with the decision.
The ECB announced in January that it would buy €60-billion ($79-billion) in bonds every month until the end of September, 2016. Each central bank in the euro zone is buying its own country's debt, with the amount determined by the size of the economy. That means the Bundesbank has to acquire the largest chunk – €10-billion a month.
The Bundesbank has had no luck prying 10-year government bonds from insurers or banks, who see no reason to sell such stable long-term assets, even when real rates are below zero. So the bank has had to go to other central banks and financial institutions outside the euro zone to meet its quota.
In every case, central banks across the euro zone will become the largest creditors in their respective countries. "That's why it's not a normal instrument," said Mr. Dombret, who was in Toronto to deliver a speech at the University of Toronto's Rotman School of Management. "It does have side effects, as every medicine has. So you have to be very very cognizant of this. We have to watch it carefully."