UPDATE 2-Schaeuble says low rates spawning "dangerous" rise in property prices

Thu Jun 19, 2014 1:02pm EDT

* Finance minister comments reflect fears of loose ECB policy

* Bundesbank says property in some cities overvalued by 25 pct

* German stability board sees no evidence of asset price bubble (Adds background throughout)

By Noah Barkin and Gernot Heller

BERLIN, June 19 (Reuters) - German Finance Minister Wolfgang Schaeuble warned on Thursday in the clearest terms yet about the risks of loose monetary policy for Europe's largest economy, saying low interest rates were already spawning "dangerous" rises in domestic property prices.

Schaeuble has long warned about the threat of speculative bubbles forming as a result of excess liquidity, but his comments at a news conference with visiting U.S. Treasury Secretary Jack Lew went beyond his usual line that low rates must correct higher over time.

They come two weeks after the European Central Bank (ECB) cut interest rates to record lows to ward off deflation and kick-start growth in sluggish southern euro states.

The move sparked criticism from conservative German economists, the media and even some allies of Chancellor Angela Merkel, who worry that the bank's one-size-fits-all policy carries risks for the steadily growing German economy, even if it hasn't sparked inflation here.

"In the long run, the amount of liquidity is too great and the level of interest rates too low," said Schaeuble.

Asked about warnings from the Bundesbank that the low rate environment risked creating asset price bubbles, Schaeuble said there were signs a rise in German property prices was reaching "dangerous" levels and this needed to be taken "very seriously".

German real estate prices were relatively stable over a period of many years until 2010, when the outbreak of the euro zone debt crisis boosted the attractiveness of German property as a safe haven investment, luring foreign buyers.

Meanwhile, historically low unemployment at home, robust economic growth and rock-bottom interest rates on mortgages encouraged more Germans to put their money into property instead of traditional savings accounts.

The German central bank began cautioning about property price rises last October, saying then that apartments in some of the country's largest cities, like Munich, Hamburg and Berlin, were overvalued by up to 20 percent.

In February, it said overvaluations had risen to 25 percent in some locations.

However many economists have played down the risks of a property bubble on a par with those which burst in countries like the United States, Britain, Ireland and Spain over half a decade ago, with devastating effects on the financial system.

At 46 percent, Germany still has one of the lowest home ownership rates in Europe. And at 10 percent, its savings ratio remains one of the highest.

On Wednesday, Germany's financial stability committee, a group set up last year to monitor potential problems in the financial system, said it had looked closely at Germany's housing market and found no evidence of an asset bubble.

The watchdog, which includes members of the Bundesbank, finance ministry and financial regulator Bafin, did warn however that the low interest rate environment was "fertile ground" for the building of financial risks.

For his part, Treasury Secretary Lew said the United States had emerged from a period of excessive property prices but noted that he would like to see more new construction in areas where prices have attained pre-crisis levels. (Writing by Noah Barkin, Stephen Brown and Madeline Chambers; Editing by Alexandra Hudson)

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