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Warning signals are increasing on the German real estate market: costs are rising, projects are being stopped, companies are going bankrupt. And the fact that property prices are falling is not a sign of recovery. An overview.
Ahead of the planned “housing construction summit”, which is taking place in the Chancellery with representatives of the industry, Chancellor Olaf Scholz and Federal Construction Minister Klara Geywitz, the mood in the housing and real estate industry is extremely bad. Experts agree: Far too little new, affordable living space is being created. New construction has collapsed, the housing shortage is increasing – as are rents. What are the reasons for the crisis?
How is the real estate market?
Sharp increases in financing and construction costs have significantly slowed down new construction in Germany. More and more real estate developers are currently stopping their new construction projects: the real estate group Vonovia, for example, declared a few days ago that tens of thousands of planned construction projects are currently on hold.
According to current figures from the Federal Statistical Office, the construction of 21,000 apartments was approved across the industry in July 2023. This corresponds to a drop of 31.5 percent or 9,600 compared to the previous year. In the first seven months of the year, the number fell by 27.8 percent compared to the same period last year.
The reduced construction activity has devastating consequences for the housing market: Back in January, Construction Minister Geywitz had to declare the federal government’s goal of building 400,000 new apartments annually as unattainable for this year. In the first seven months of the year, just 156,200 new apartments were approved.
And the situation is similar with single-family homes: more and more citizens are currently burying their dream of owning their own house. According to the Federal Statistical Office, building permits here fell by 36.5 percent to 30,800 in the first seven months.
Why are so many construction projects stopped?
There are two important reasons for the decline in construction activity: On the one hand, the key interest rates have been raised significantly by the European Central Bank (ECB) since mid-2022. As a result, building interest rates are currently four to five percent. Added to this are the higher construction costs in Germany due to increased energy prices, more expensive materials or delivery difficulties.
For many real estate developers and private builders, financing new construction projects is becoming increasingly difficult – or impossible. And more and more construction companies are already insolvent: for example the Centrum Group, four companies of the project developer Gerch and three companies of the Nuremberg Project real estate group.
What’s happening with prices right now?
Rising financing costs and high inflation have been reducing the purchasing power of Germans for a long time. As a result, real estate prices fell for the second year in a row: apartments and houses fell on average by 9.9 percent compared to the second quarter of 2022. This is shown by current figures from the Federal Statistical Office. It was the largest decline since the time series began in 2000.
The declines compared to the same quarter of the previous year were particularly significant in Berlin, Hamburg, Munich, Cologne, Frankfurt am Main, Stuttgart and Düsseldorf. Here, single- and two-family houses fell in price by 12.6 percent, and buyers had to pay an average of 9.8 percent less for apartments than a year before.
However, especially in large metropolises, the prices for houses and apartments are still extremely high. Real estate in Frankfurt am Main and Munich in particular is still considered highly overvalued. According to the “Global Real Estate Bubble Index” from major bank UBS, Frankfurt has an index value of 1.27 and Munich 1.35. From a value of 1.5, a city is considered to be at risk of a real estate bubble.
In the medium term, UBS assumes that real estate prices in Germany’s major cities will rise again: “As soon as financing conditions improve again, we could see the next price rise – not least because of the ongoing shortage of housing,” predicts Maximilian Kunkel, chief investment strategist in Germany.
What does this mean for tenants?
According to the Eduard Pestel Institute for Systems Research, the housing shortage is greater than it has been in 20 years. According to a study by the institute, there is a shortage of more than 700,000 apartments in Germany – especially in the affordable range.
Meanwhile, rents continue to rise: According to the German Tenants’ Association, asking rents in Berlin, Hamburg, Munich, Cologne, Frankfurt, Düsseldorf, Stuttgart and Leipzig rose by an average of 6.7 percent in the first half of the year.
In Berlin alone, asking rents have increased by 16.7 percent year-on-year. The most expensive rental market is Munich at 22.25 euros per square meter. “These numbers are frightening and once again make it clear: the legislature must act immediately,” says the President of the German Tenants’ Association, Lukas Siebenkotten.
What could help against the crisis?
In order to stimulate the sluggish housing construction, there is a suggestion that the state impose less strict requirements for new buildings. The so-called EH-40 standard for insulating houses could be temporarily suspended.
A new funding program with low-interest building loans for families is also planned. The traffic light government has also introduced better depreciation options.
However, experts doubt that the measures are sufficient. The real estate industry, for example, is calling for a reduction in real estate transfer tax, less bureaucracy and the concessional release of public land for the rental housing market.
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