Multi-Crisis in Housing Market

Norman Rockwell: Painting the little House (1921) // Public domain

A study by the Pestel Institute and the Construction Research Institute ARGE caused a stir at the beginning of the year. According to calculations, a housing shortage of over 700,000 units could occur in Germany during this year. This would be the largest housing deficit in over twenty years.

Moreover, the housing market and real estate industry are constantly making headlines: the discussion about the planned renovation obligation within the EU, the plans of German Minister of Economics Robert Habeck for an early ban on new oil and gas heating systems, and the seemingly endless speculation about the future development of property prices are just a few examples of the current topics and headlines generated by the housing market.

The situation is anything but easy. The German government’s stated goal of constructing 400,000 new housing units per year seems unattainable under the current conditions. Construction costs and land prices continue to rise, the era of low interest rates is definitively over, and there are significant material and supply shortages. Our new policy paper “The Situation in the Housing Market” provides a concise overview of the current situation and explains how the current problems have arisen.

Why Is Current Situation So Challenging?

There are various reasons for the current situation in the housing market. The following list highlights five of these causes. It is not exhaustive but aims to provide an impression of the complexity of the influencing factors.

Booming Cities

By the end of 2021, 83.2 million people were living in Germany, approximately 1.9 million more than in 2000, representing a population growth of about 2.3 percent. This population increase was distributed very unevenly regionally. The so-called TOP7 cities (Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich, and Stuttgart) alone experienced a population growth of over one million people during the same period. The population development in recent years has presented major challenges to the housing markets in these metropolises.

Insufficient Construction Activity

The federal government has set a target to build 400,000 new housing units every year during the current legislative period. Due to the Russian aggression war and its associated consequences, it currently appears unlikely that this goal will be achievable. However, it is clear that insufficient construction has been taking place, particularly in the past. For example, in 2009, only 159,000 new housing units were completed. It was only from 2010 onwards that residential construction gained momentum again, but the gap that was created in the preceding years could never be fully closed.

We Are Experiencing Cost Explosion in Construction

In the past years, and especially at the beginning of the COVID-19 pandemic, a significant increase in construction costs has been observed. This price surge has dramatically accelerated in the past year, according to data from the Federal Statistical Office. While consumer prices increased by approximately 46 percent between 2000 and 2022, construction costs grew by a substantial 78.5 percent.

We Are Witnessing Explosion in Land Prices

Compared to the rise in construction costs, the increase in land prices appears downright moderate. From the year 2000 alone until 2021, land prices have surged by a whopping 168 percent, while construction costs have risen by around 78 percent. This means that the prices per square meter of land have more than doubled in the past 20 years, showing a much more dynamic development than consumer prices, which have only increased by 36.6 percent during the same period.

Interest Rate Turnaround Seems to Be Lasting

The past years have been characterized by historically low interest rates. However, the significant increase in the inflation rate has also pushed up interest rates, including mortgage rates. An analysis by Interhyp reveals that long-term fixed-rate loans (commonly used for financing property acquisitions) are now being granted with a considerable risk premium. The interest rate for ten-year loans was still at only 1 percent at the end of 2021. Currently, the interest rate for a ten-year loan stands at 3.84 percent. For loans with a fifteen-year fixed-rate, the current interest rate is 3.95 percent, compared to 1.29 percent at the end of 2021 (as of April 1, 2023).

How Can Situation Be Improved?

The situation in the housing market is challenging, and it is unlikely to change quickly due to the current conditions. Nevertheless, there are several measures that can help improve the situation:

  • End unjustified market interventions: Property interventions like those in Berlin are wrong from both a moral and economic perspective, creating an atmosphere of uncertainty that discourages investment.
  • Focus on building land: To break the price surge of recent years, additional building land needs to be activated, particularly in cities, and bureaucratic hurdles for repurposing should be minimized.
  • Address the structural increase in construction costs: The 16 building regulations of the federal states have too many norms and requirements. Harmonizing existing state building regulations would particularly promote the importance of serial construction in the country and lead to cost savings.
  • Build upwards: When comparing with international metropolises, it becomes clear that German cities have low-rise structures and provide little room for true high-rise buildings. This needs to change, and especially the conversion of attic space should be made as straightforward as possible.
  • Support homeownership: The increasing shift away from homeownership has the undesirable side effect of further exacerbating the situation in the rental housing market. Therefore, reductions in real estate transfer taxes are necessary to lower the ancillary acquisition costs.
  • Strengthen rural areas: With the rise of remote work, our working world is currently undergoing a real revolution that could also lead to the strengthening of rural areas. However, this requires excellent digital infrastructure and well-developed transportation links between urban and rural areas.

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