Bottoming out in the German housing market:
INTRODUCTION:
There is currently no good news to report about the German housing market. Virtually no other developed country has seen new construction plummet as sharply as in Germany. While the purchasing managers’ overall index for the Eurozone was 46.1 points in March, the weakness of the construction sector removed it even further from the expansion threshold of 50 points at 42.4 points. The situation for construction firms in Germany has recently been particularly weak with an index reading of 38.3 points.
According to the Federal Statistical Office, only 260,100 apartments were approved for construction in Germany in 2023. This means that building permits granted last year were at their lowest level since 2012 and far below the federal government’s goal of building 400,000 apartments per year. The majority of analysts are also quite pessimistic for this year. For example, the ifo Institute assumes that only 225,000 apartments will be completed in 2024.
A widely cited reason for this weak development is the rise in interest rates. The deterioration in financing conditions caused by the central banks’ increase in key interest rates has put a strain on the affordability and valuation of real estate. But in addition to the interest rate, there are other reasons why the situation in Germany has developed differently than in other Euro countries (which, as is well known, are influenced by the same interest rate policy). The existing regulation of the housing market has an impact on the propensity to invest. In addition, political projects such as the Building Energy Act caused uncertainty among investors. At the same time, however, living space is scarce, with ongoing immigration increasing demand and further exacerbating the shortage of supply. Due to the low stock of social housing, the state also acts as a competitor for the scarce private living space and thus exacerbates the housing shortage.
However, there seems to be an improvement in sight. The high inflation rates of 2022 and 2023 appear to be a thing of the past. According to our forecasts, consumer price inflation in Germany is likely to fall to around 2.5% this year. This opens up room for interest rate cuts by the ECB in the medium term, which should also have a positive impact on the situation on the housing market.
CONCLUSION:
The increased interest rates and the economic downturn in Germany have placed a heavy burden on real estate prices and construction activity. High construction costs also make new construction more expensive and, in addition to the higher interest rates, make it more difficult for those interested in owning their own home to afford it. A larger part of the demand is therefore concentrated in the rental market and, in addition to the expected higher inflation rates in the longer term, promotes more robust rental growth rates, especially in metropolitan areas. The existing shortage of supply is exacerbated by influx.
Construction completions are likely to continue to decline in the coming years and will not keep up with the persistently high demand. In view of imminent key interest rate cuts, an improving economic situation in the Eurozone and the underlying excess demand, real estate prices should experience setbacks as a result of a difficult and volatile bottoming out phase, which offer interim entry opportunities. This also means there is potential for recovery for the residential real estate groups, which had to report losses last year due to high value adjustments, and their shares, which suffered severe price declines in some cases. However, it is important to keep an eye on companies’ debt, as this poses risks for investors. Regulatory intervention could also have a negative impact on investors. However, regulatory changes also offer opportunities, as the restructuring of depreciation options for new buildings recently demonstrated.
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