IW Köln criticises German housing targets as exaggerated and 'unrealistic'

Germany's Institut der Deutschen Wirtschaft (IW) Köln has produced a new study criticising the incoming German government coalition's stated plans to build 400,000 new housing units per year. The actual number should be 308,000 units annually - and built in different places than the government plans to build, says the report, produced by the researchers at the IW Köln on behalf of Deutsche Reihenhaus AG.

The researchers argue that much of the government's planned building programme is in regions which are likely to shrink in economic importance in the coming years, producing further unwanted vacant properties. The government's goal of 400,000 units a year is overshooting the target, they say. They also argue that sticking to this goal is simply unrealistic, given material and personnel bottlenecks, and other pressures in the construction sector.

The strong suggestion is that the coalition is indulging in a certain amount of hype, and their declarations should be taken with a pinch of salt. "Obviously, the target increase is intended to convey that policymakers are willing to quickly address the problem of housing shortages and rising rents and prices", they comment drily.

This year the actual number of housing completions is likely to be 320,000 nationwide, missing the outgoing government's self-declared goal of 1.5 million completions over the most recent four-year period by a margin (the IW puts the number of completions at 1.21 million).

The study assumes that many people will continue to be drawn to the big cities in the coming years: Although more Germans will work on the move and commute less frequently, the basic orientation towards a city will not change.

As a result, in the seven largest German cities alone, around 58,100 new flats would have to be built annually by 2025. In Berlin there are 22,200 new flats every year, in Hamburg 10,500, in Munich 7,800 and in Cologne 5,700. Specifically in Cologne, the gap between demand and completed new buildings is the greatest nationwide: Cologne was recently able to cover just 40% of the demand, with only Kiel (28%) and Erfurt (38%) faring worse.

According to IW real estate economist Ralph Henger, "In order to eliminate the housing shortage, many large cities and their surrounding areas will have to build significantly more than before in the next few years."

At the same time, the population in 209 of the total of 401 German districts (Landkreise) is destined to fall in the coming years. Every second district (202) is currently building more housing than necessary. "In many rural regions, there is a threat of massive vacancy and decay in the coming years," says Ralph Henger. This particularly affects regions in Saxony-Anhalt and Saarland.

"There is no question of new construction to meet demand. It would make more sense to expand the catchment areas of the big cities and invest more in the neighbouring infrastructure," he says. In the countryside, on the other hand, the goal must be to invest more in renovation and maintenance, and for significantly less new building.

Henger and his colleague and fellow author Dr. Michael Voigtländer highlight in the study the different distribution of demand: Metropolitan regions will remain in strong demand, while other parts of the country will shrink. Accordingly, they advise using the existing stock in districts with declining populations. Metropolitan areas should be enlarged and surrounding communities better connected by public transport; fast internet is important to strengthen the locations of surrounding communities as places of work. The economists conclude that there is a need for "a dual strategy that addresses the expansion of housing supply in the tight markets" on the one hand, and "promotes the non-tight markets on the other hand".

Separately, the most recent figures released by the Federal Statistics Office (Destatis) shows the number of building permits for apartments fell for the third month in a row, to 30,149 units, which is 1.8% less than in the previous month, adjusted for seasonal and calendar effects. Overall, however, from January to August this year 5.1% more permits were issued than in the same period last year.

According to the data, the increase in this period affects almost all types of new buildings. Single-family houses increased by 7.2%, two-family houses by 32.5% and multi-family houses by 1.2%. Only for residential homes were fewer building permits issued than in the first eight months of 2020 (minus 22.5%).

In August, the number of building permits for flats in new single-family and two-family houses rose by 8.5% and 2.6% respectively compared to the previous month. In contrast, a decline of 4.4% was recorded for flats in new apartment buildings. The number of permits for conversion or extension of existing flats decreased by 11.1%.

The number of building permits is an important indicator for new construction in the battle against housing shortages in many cities. However, in many cases flats are approved but not initially built - often, for example, because tradesmen and construction companies simply don't have the capacity.