REFIRE
The ongoing crisis in Germany’s residential construction market shows no signs of abating, with recent figures from the Federal Statistical Office painting a bleak picture.
From January to August 2024, building permits for new homes dropped by 19.3%, or 33,900 units, compared to the same period in 2023. This marks one of the steepest declines in years and has raised serious concerns about the future of the housing market. In August alone, just 18,300 new dwellings were approved, a 6.8% drop from August 2023.
The most dramatic falls were in the single-family home segment, where permits plunged by 26.6% to just 25,300 units. Multi-family housing, a crucial element in addressing the country's housing shortages, also saw approvals slump by 19.6%, leaving just 75,400 new apartments in the pipeline.
Felix Pakleppa, managing director of the Central Association of the German Construction Industry (ZDB), summed up the situation grimly: “Germany's housing crisis continues. Despite many measures taken by the federal government, the willingness to invest remains low, also because the impulses from Berlin are too weak.”
Government measures fail to stem the decline
The decline comes in spite of various efforts by the federal government to stimulate construction. The much-discussed Building Type E model, which simplifies building regulations to lower costs, is due for cabinet approval in November 2024. But without a solid legal framework, there are fears it could become “a paper tiger,” according to Pakleppa. He also called for civil law changes to shield contractors from legal challenges if they deviate from traditional building standards.
Looking ahead, the construction industry is placing high hopes on the housing summit in Hamburg this December. “We very much hope that there will be a final offensive for residential construction in this legislative period,” Pakleppa added. Yet, with financing and construction costs rising, coupled with high mortgage rates, optimism is in short supply.
Bleak outlook for 2025 and beyond
According to the Munich-based Ifo Institute, the outlook for the housing market in the next 2-3 years remains dire. “Nothing will happen in 2025: investments will actually shrink further,” predicted Ifo President Clemens Fuest. He doesn’t expect the central bank’s recent interest rate cuts to have a meaningful impact until 2026 at the earliest. This prolonged stagnation leaves little hope that the government’s ambitious goal of 400,000 new homes per year will be met anytime soon.
Klaus Wohlrabe, head of the Ifo surveys, added that mortgage rates for households remain high despite rate cuts, contributing to a slowdown in new home orders. “The lack of orders in residential construction has recently intensified,” he noted, with over 52% of construction companies reporting order shortfalls in September, a figure that has been rising steadily.
Long-term implications for the housing market
The ongoing slump in building permits is not just a short-term issue. With construction plans down dramatically and interest rates unlikely to spur investment until at least 2026, the German housing market is likely to remain in a deep freeze for the foreseeable future. This could further exacerbate the country’s already critical housing shortages, especially in urban areas where demand for affordable housing is highest.
The decline in building permits for multi-family homes—down nearly 20%—is particularly concerning, as this sector is critical for addressing urban housing shortages. Combined with the drop in single-family homes, the shortfall in new developments could lead to upward pressure on rents and home prices, worsening affordability issues for potential buyers and renters.
In the coming 2-3 years, the outlook for Germany's housing market remains grim. Without significant government intervention or a dramatic shift in economic conditions, it’s hard to see how the sector will bounce back. Real estate investors, developers, and policymakers will need to watch closely as the housing summit approaches, hoping for decisive action that can reverse the tide.