Germany’s property market is looking very sickly
IF GERMANY is once again the sick man of Europe, its ailing property and construction industries are unlikely to provide an antidote.
Following a decade-long property boom fuelled by cheap financing, new construction and mortgage demand are collapsing, while residential and office project developers are filing for insolvency in droves.
The bleak outlook risks dragging Germany back into recession, while worsening an already acute housing shortage. And the three-party coalition government appears at odds about how to help.
Europe’s biggest economy is challenged on several fronts. Demand for German manufacturing exports is sagging, and its energy-intensive industries are having to adapt to life without cheap Russian gas; meanwhile, China has become a much more forceful competitor, especially in autos.
Contributing around 15 per cent of national valued added, construction and real estate activities were until recently a thriving economic counterweight, but these too are now starting to flail.
New construction starts slumped by half in the first six months of 2023, and building permits for new dwellings fell by more than one-quarter. A toxic mixture of higher financing expenses, building-cost inflation, weak demand and policy uncertainty has resulted in projects being delayed or cancelled. With interest rates set to remain higher for longer due to sticky inflation, the situation may get worse before it gets better.
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Several developers have filed for insolvency in recent weeks, potentially leaving investors, homebuyers and contractors out of pocket.
Having set a target of building 400,000 new homes a year to ease pressure on the rental market, Germany will be lucky if it builds half that next year. Listed property giant Vonovia SE has halted all new construction; it lost two billion euros (S$2.94 billion) in the second quarter, having written down the value of its properties. “Building indicators in Germany are particularly weak,” the boss of Swiss sanitary systems supplier Geberit told investors earlier this month.
As elsewhere, rising rates are creating winners and losers. Many German homebuyers locked in 1 per cent mortgage rates for a decade or more, thereby shielding borrowers and the banking sector from forced selling.
Yet, fewer than half of Germans own their own homes – the lowest share in the European Union, and far less than the roughly two-thirds of Americans who own their property.
Most Germans didn’t therefore benefit from the property boom. While residential prices have fallen 6.4 per cent from the peak in June 2022 (during which time overall consumer prices increased 7 per cent), transaction volumes have plunged. The upshot is even more people turning to the rental market where costs are rising.
Tenants who signed leases years ago are still doing OK; their low rents may not have increased much, and they have no incentive to move.
In contrast, new tenants are often forced to live in apartments that aren’t subject to rent control – owners of furnished apartments with short-term leases have more freedom to adjust rents.
In Berlin, furnished apartments now account for the majority of those advertised. New tenants are also more likely to have rents indexed to inflation. New rents in seven of Germany’s biggest cities rose 6 per cent year over year in the second quarter, according to data provider vdpResearch.
“It’s more or less impossible for an average or even high-income household to find an appropriate rental apartment for their needs” Ronald Slabke, the boss of real estate tech company Hypoport told investors this month. “If you want to have a nice home in Germany in the next five to 10 years, you need to acquire it. You will not be able to rent it anymore.”
The far right Alternative for Germany party – who around one-fifth of Germans now say they would vote for if there were an election now – hopes to make political capital from the issue. They blame Germany’s welcome of migrants – almost 1 million Ukrainian war refugees arrived last year – for exacerbating a shortage of homes.
Property developers who made fat profits in the boom years and overpaid for land aren’t necessarily worthy recipients of aid, but Germany can afford to stop a property downturn turning into a meltdown.
This week, the government unveiled a 10-point plan to boost the economy, which included enhanced tax deductions for new home construction. The coalition is expected to unveil further housing measures at a summit in late September.
However, the coalition’s attempt to move on from protracted infighting was undermined when Chancellor Olaf Scholz’s Social Democrat party said stricter rent controls are needed. (Currently, landlords are only allowed to increase rents by a maximum of 15 per cent in three years in areas with acute housing shortages. The SPD proposal would reduce this cap to 6 per cent.)
Landlords often ignore the existing rules – further interventions risk discouraging housing investment.
The debate is symptomatic of a broader problem with policy uncertainty and excessive bureaucracy in Germany.
Earlier this year, the government announced plans to all-but outlaw fossil fuel boilers, only to water down the proposals following an outcry from conservative media over the costs. Applications for heat-pump subsidies subsequently slumped.
Net direct investment in Germany plunged last year to the lowest level on record; some very heavily subsidised semiconductor factory announcements haven’t altered the impression that businesses see better opportunities and conditions elsewhere.
Just as at the turn of the century, it may require a protracted economic malaise to spur Germany to take decisive action. BLOOMBERG
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