Germany's central bank warned Thursday about skewed valuations in the housing market, calling it a "specific vulnerability" as property prices continue to soar.
"We have basically seen all indicators — prices, credit — those indicators kept increasing in Germany and you don't really see a big effect of the pandemic," Claudia Buch, vice-president at the Bundesbank said.
Speaking to CNBC's Karen Tso, she added that her team at the Bundesbank has come up with estimates of about 10% to 30% for price deviations from their fundamentals.
"What's a bit of a new development is that these overvaluations are also more widespread, so they are outside of the big cities ... [and] almost 90% of the households expect prices to keep increasing," she said.
The latest financial stability review by the Bundesbank also noted Thursday that German lenders should build up capital buffers to address these potential issues in the housing market.
There are concerns that with overvaluation in the sector, banks are not estimating the true value of collateral correctly, and are therefore more exposed to future price adjustments.
"Financial stability would be at risk if destabilizing developments were to take hold in the property market, whereby rising credit volumes and prices were to coincide with a deterioration in borrowers' debt sustainability," the German central bank said in the report.