Investment flashpoint and shortfall of apartments does not amount to a housing crisis

In a report contrasting the current situation on the German residential market with a genuine housing emergency in the immediate post-war period, Dr. Günter Vornholz, Professor of real estate economics at the EBZ Business School in Bochum, argues that we should not be unduly alarmed by headlines heralding a housing crisis when the situation on the residential rental and investment markets is in reality driven by a combination of prevailing economic factors. 

Whilst there is certainly a shortfall in the supply of apartments whereby rents are rising faster than the inflation rate, there is also an excess demand on the capital markets as investors look for higher-yielding alternative investments and turn their focus to property, resulting in some extreme price hikes, which have met with both protests and concerns about a price bubble.  

The post-war era

Vornholz uses a stark comparison to examine the situation in the immediate post-war period, when there was a real housing crisis in the occupied zones of western Germany. Of the total stock of 11 million apartments in 1939, around 2.3 million had been destroyed in the war. A similar number suffered extensive damage and many became unusable. The result was a shortfall of millions which cannot be explained by mere statistics, as is the case today.

He explains that the housing crisis was exacerbated in the early post-war years due to the millions of former soldiers returning from the war and the numbers of refugees from eastern Germany fleeing to the west. Many of the homeless could only be accommodated by friends or relatives. Others held out in the ruins until this was legislated against because of the dangers of structural collapse. The average household size almost doubled from 3.6 to 6.0 within just a few years. 

Official figures show that in 1946 the three western occupied zones comprised 13.7 million households compared to just 8.2 million residential units, an acute shortage of around 5.5 million apartments due to war and migration. He argues that the housing crisis after 1945 can in no way be compared with today’s situation, which is driven by a scarcity of residential apartments and lack of investment products. 

Scarcity of apartments on the letting markets

Firstly, Vornholz explains that there is a polarisation in letting market trends between the individual regions and between cities and rural locations. However the overall trend is that rents across Germany have actually risen less than the inflation rate over the last 10 years.

Whilst rents and capital values are under pressure in rural locations due to the high vacancy rates, demand for rental apartments has far outstripped supply in the major cities and conurbations - the so-called high-growth regions - which is reflected in rising rents and falling vacancy levels.

According to the Bundesinstitut für Bau, Stadt- und Raumforschung (BBSR), average asking rents in the 13 German cities with populations over 500,000 were in the order of €11.20/m²/month in 2018, which is significantly higher than in other towns and cities. Rents rose by around 50% in the period 2010 - 2018. bulwiengesa AG reports a similar trend in the Top 7 cities. In the period 2005 – 2018, rents in the higher priced residential locations rose by over 70% whilst rents in weaker locations rose by around 65%, which equates to an increase of approx. 4% p.a. 

The scarce supply on the residential markets is also indicated by the vacancy level. Just under 30,000 apartments remained vacant in the Top 7 cities over the last year. However, there is still no actual housing crisis - even in Berlin, which experienced the strongest protests against the residential economy and significant rental price hikes. CBRE/Empirica estimates the market vacancy in the city at around 15,300 apartments in multi-family buildings or just 0.9% of the total stock. The member companies of the Verband Berlin-Brandenburgischer Wohnungsunternehmen e. V. (BBU) operate over 700,000 apartments, which is around 43% of Berlin’s entire stock of rental apartments, and estimate its vacancy at around 1.7% or 12,000 apartments in 2018. 

The rental price increases and the fall in vacancy in the cities can be attributed to a number of fundamental trends, which have resulted in significantly greater growth in demand compared to supply. These include dramatic increases in incomes since the mid-2000s which has driven the demand for apartments, organic population growth and migration - both within Germany but also influx from abroad. The destination of most inward migration is the major cities. This combines with a decrease in average household size, which has meant an increase in the total number of households. 

At the same time there is a shortfall in the numbers of new completions, such as that experienced in Berlin. Just under 90,000 new-build apartments have been completed since 2005 whilst the number of households rose by around 105,000. Demand is thus well ahead of supply, which explains the growth in rental prices. 

Vornholz argues that although the rental price growth and vacancy level in the major cities is evidence of a shortfall in the number of apartments, any outcry relating to a “rental price explosion” or a “housing crisis” is out of place in this context. Rental price increases in the order of 5% p.a. are no indication of a genuine housing emergency, but moreover indicate that there is a scarcity of apartments in the major cities. 

Investment flashpoint on the residential investment markets 

There is a different situation on the residential property investment markets, in particular in the major cities. These markets comprise the transaction of condominium apartments and houses either for owner-occupation or above all as investment properties. Investment market participants include both private and institutional investors. 

Purchase prices and rents grew at around the same level in the period 2005 - 2010. Gross rent multipliers grew only marginally, whilst rents and purchase prices in tandem increased by around 4%. However they have grown at significantly divergent rates since the year 2010. Purchase prices have exploded in the Top 7 cities over the last 10 years, and have more than doubled in the upper price bracket since 2010. Growth rates in weaker residential locations are not so pronounced but are still significantly greater than for rental prices. 

This is due to the strong demand from private and particularly institutional investors, which is also attributable to the basic principles described above. Demographic factors and rising incomes have also resulted in increased demand. 

Vornholz also mentions the impetus resulting from the European Central Bank’s (ECB) monetary policy. He explains that there is a strong correlation between the start of the ECB’s quantitative easing programme in March 2015 - involving the purchase of assets from the commercial banks with the intention of supporting economic growth within the Eurozone - and the period of greatest purchase price growth. This has also resulted in a significant hike in average purchase price growth rates over the last 5 years compared to previous years. According to RCA, growth rates have all but doubled. The average growth rate was around 9.6% over the last 5 years compared to around 5.9% in the 10 years before.