Germany heading for 'brutal awakening' as housing crisis deepens

Report highlights dramatic slump in construction activity and dwindling buyer demand

The German real estate industry got a chance to see a grim snapshot of the harsh realities it faces, and how much worse things could be looking in two years time, at the traditional handover of the 'Frühjahrsgutachten' or Spring Report to the Bundesbauministerin, Frau Klara Geywitz, this week.

The occasion was the first day of the Quo Vadis, the annual event hosted by Heuer Dialog in Berlin's Hotel Adlon, this year attended by up to 400 industry representatives. The Quo Vadis event is always timed to co-incide with the annual delivery of the so-called Frühjahrsgutachten Immobilienwirtschaft, or Spring Report on the Real Estate Industry, prepared by a committee of Wise Men (economists and real estate experts, mainly).

The report highlights the dramatic slump in new construction activity, dwindling (buyer) demand for housing, an energy and construction crisis, collapsing financing and waves of cancellations. It concludes that investment in residential construction is now at its least attractive for many years. And while the commercial real estate market, is still considered robust in many areas, the sharp rise in energy costs means the energy balances of buildings need to be reviewed much more critically.

Dr. Andreas Mattner, president of the umbrella industry lobby group ZIA, which published the report, did not mince his words when handing over the study to minister Klara Geywitz. Germany is heading for a "brutal awakening", he said, with a dramatic housing shortage looming. The housing deficit has reached its highest level in twenty years, further exacerbated by the "wave of cancellations" in the construction sector, while demand for housing is growing further due to the influx of refugees into the country.

ZIA is now expecting a shortage of about 700,000 apartment units by 2025 - the equivalent of all the housing in the states of Bremen and Saarland, as it described it. In 2021 a total of 293,400 apartments were completed across the country, and the figure for 2022, while not yet confirmed, are thought by the industry to have been about 280,000 units. For this year, 240,000 is at the top end of estimates (with many predicting as low as 200,000).

The number of inhabitants in Germany rose by 1.1 million last year over the previous year. About a million of these are Ukrainian refugees, with the remainder being normal net immigration. The reports says this has "led to a significant additional demand of around 200,000 apartments." It predicts a further decline in the nationwide vacancy rate of about 600,000 apartments (2.8% of the market).

"This double or triple shock on both the supply and demand sides occurred at a time when, by many measures, the housing markets were slowly moving in the direction of easing," write the Wise Men in their conclusion on the state of the housing market. But the balance of supply and demand has been shown to be more fragile than expected, as we are now witnessing, they say. With the result that the gap in real completed construction to demand will be most acutely felt in 2024.

The report predicts a further rise in residential rents as a result, after last year's jumps which saw rents on new leases for second-hand apartments rise by 5.2%. The national average is now €9.10 per sqm per month.

In the first half of 2022, purchase prices for owner-occupied apartments rose by 7.8% nationwide to an average of €3,324 per sqm. Since the end of the second quarter those prices are either stagnating or have actually fallen, particularly in western German cities.

The shortage of housing and the cancellation of new developments was described by ZIA's Dr. Mattner as "increasingly dramatic". The plain fact is, he said, that "Achievable rents are now increasingly below cost rents." This 'profitability gap' could trigger an increasingly threatening 'housing gap', he warned. ZIA was now calling for a radical departure from the usual financial and regulatory limitations with which state authorities act to slow down the real estate industry in times of crisis. "If we continue as we have done, we will not be able to avert a housing debacle in 2025," Mattner said bluntly.

One of the five Wise Men, Dr. Lars Feld, in his talk analysing the wider economic environment, also stressed the factors making investment in construction so unattractive at the moment. "Project developers and housing companies lack the incentives to build because, on the one hand, the prospect of falling property prices is a risk with rising construction costs and expensive (interim) financing - while on the other hand, tolerance for higher rents is low in view of high inflation and low real incomes, and that reduces rental yields while interest rates are rising."

Dr. Feld is also an advisor to Finance Minister Christian Lindner, and hence close to the source of government - or at least financial - thinking. He assumes that inflation will remain high, and that the European Central Bankwill continue to raise the key interest rate. Property owners and developers should expect interest rates of 5-6% for their financing, he said - up from last year's 4% which itself had quadrupled over the year. He rejected calls for higher subsidies for new building, saying this would only add fuel to the fire, driving prices up further. It's not going to happen, he left his listeners in no doubt.