Why Germany’s housing crisis is expected to drag on

Germany needs new homes to address its shortage – but fewer new flats are being built now that at any time in the last 16 years.

housing germany
New housing being built in Gelsenkirchen. Photo: picture alliance/dpa | Fabian Strauch

Renters and would-be buyers alike are feeling Germany’s current housing crisis deep in their wallets.

Rents around the country were up a record 7.5 percent in the first quarter of 2023. In Berlin, they rose 27 percent since November. Home prices are also up – albeit more modestly – and more than a million households are spending at least half their income on rent.

One of the main reasons for skyrocketing rents is simply a function of the most basic principle of economics – there’s just not enough housing supply to meet housing demand. It leaves both renters and buyers fiercely competing against each other for an ever shorter list of available places.

READ ALSO: More than a million German households spend half their income on rent

That’s also a problem that takes time to fix. A home obviously can’t simply be built overnight. Any uptick in new construction to help increase housing stock won’t get noticed until a few years from now.

So even if it wouldn’t immediately solve the housing problems of today – are enough new homes being built now for people in Germany to get some relief in a few years?

Data out from the Federal Statistics Office Wednesday suggests not.

In fact around 30 percent fewer housing permits were issued in March compared to the same time a year ago. That means that fewer projects even have the permission to break ground, let alone begin to actually build. This is the lowest number of housing starts the country has seen in 16 years.

The statistics authority says inflation is a big part of this, with interest rates for building loans and the price of construction material having shot up due to Russia’s invasion of Ukraine.

READ ALSO: Germany sees record high rent increases in 2023

The Association of German Construction Industries is now warning that the government needs to rethink its policy of subsidising housing – otherwise new construction projects could plummet.

Builder Vonvovia has already stopped its new construction plans for 2023, arguing that rents of €18-20 per square metre would be necessary to make many new housing projects profitable. The national average of rent of currently around €8 per square metre and €12.55 in Berlin. Munich – Germany’s most expensive – is currently the only city with average rents in Vonvovia’s quoted range.

Vonvovia claims that around 40 percent of its construction costs are linked to government regulations in Germany, and that relaxing some of these could help alleviate price pressures.

The federal government and many state governments currently have housebuilding targets. Berlin’s new grand coalition of the Social Democrats and Christian Democrats currently aims to build 20,000 new places a year with 5,000 of that for affordable social housing.

The federal government’s target is 400,000 new homes a year, but Housing Minister Clara Geywitz has already said the government may manage only half that number in 2023.

READ ALSO: German government set to miss target for new homes this year

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How high interest rates are hampering homeowners’ dreams in Germany

Rising interest rates are driving property developers in Germany into bankruptcy - and leaving would-be homeowners out in the cold. Will the government's latest plans to tackle the crisis be enough?

How high interest rates are hampering homeowners' dreams in Germany

Valeriy Shevchenko felt like he made the purchase of his lifetime when he beat a queue of prospective buyers to secure a two-bedroom apartment in one of Berlin’s most popular districts.

Two years on, the 33-year-old’s housing dreams have come crashing down after the developer of his new home, Project Immobilien, went bankrupt.

Hit by a sudden jump in interest rates and raw material costs, twice as many developers have filed for insolvency over the last year than during the previous 12 months.

Like hundreds of homeowners-to-be across the country, Shevchenko found construction of his new home suddenly halted, as workers cleared out of the site where the concrete skeleton of the building stands with no windows.

READ ALSO: Germany sees record drop in property prices

“From the middle of August, the construction was frozen. The cabinets for the workers here, the crane in the middle, everything moved away,” said Shevchenko at the site, shellshocked by the setback.

With such scenes multiplying across the country, Chancellor Olaf Scholz’s government on Monday offered a new package of measures to help ease the pressure on builders and homebuyers.

They include a pledge to not toughen up energy standards that could prove costly for developers, while extending mortgage help to families and financing for renovation.

The construction sector voiced satisfaction with the package, with Tim-Oliver Müller, president of German building lobby group HDB, saying that the measures were “more comprehensive than expected”.

‘All my savings’

For years, record low interest rates and strong demand had spurred new projects and investment in Germany’s property market.

But a sharp rise in consumer prices as a consequence of Russia’s invasion of Ukraine has forced the European Central Bank to aggressively raise interest rates to curb inflation, drastically pushing up mortgage costs and in turn bringing down property prices as well as profit margins of building projects.

Builders are also suffering from higher raw material costs, a problem that had already begun during the pandemic but which has been accentuated by the Ukraine war.

A construction worker works on the new construction of an apartment building in the new development area of ​​Hanover-Kronsrode.

A construction worker works on the new construction of an apartment building in the new development area of ​​Hanover-Kronsrode. Photo: picture alliance/dpa | Demy Becker

“Investors no longer know how to make certain projects profitable,” said Müller.

In a sign of the crisis, developer giant Vonovia recently decided to put 60,000 projects on hold.

One in five property companies has reported cancelling building projects in August, while 11.9 percent face financing difficulties, according to a recent survey by economic research institute Ifo, which described the figures as unprecedented in 30 years.

READ ALSO: Why does Germany keep missing its house-building targets?

Many of the halted projects are also well advanced, pushing buyers into dire financial straits.

In Berlin, investors of the Project Immobilien’s construction had already paid half of what is due.

“I’m not a rich person. My money is the fruit of my labour,” said Shevchenko, who had already paid up €250,000 for the apartment he bought for half a million euros.

Valeriy Shevchenko

Valeriy Shevchenko of Russia poses in front of the site of the unfinished “Malmoerstrasse 28” residential housing project on September 18th, 2023. Photo: JOHN MACDOUGALL / AFP

With no insurance purchased by the building company or the future homeowners, there is no financial protection against the sudden bankruptcy.

Their only hope now is to find someone else to take over the construction, or to finish it themselves.

“I never thought that something like that could happen in Germany,” said Marina Prakharchuk, 39, with tears in her eyes.

The Belarusian had paid up €175,000 for her 45-metre square apartment.

“All my savings are in there,” said the employee of a logistics company.

Housing shortage

Beyond the investors left roofless by insolvent developers, the property crisis risks spiralling into a giant social crisis as the knock-on effects from the building slowdown crash into the rental market.

Scholz’s government had promised to build 400,000 homes a year to alleviate an endemic housing shortage made worse by burgeoning demand from an inflow of refugees and foreign workers.

But building permits have nose-dived 25 percent between January and June compared to a year ago.

READ ALSO: EXPLAINED: What is Germany doing to solve its housing crisis?

Experts believe the sector will struggle to even hit 250,000 in new build approvals this year, while next year bodes no better with a forecast of under 200,000.

With fewer new housing stock coming on the market, rents are rising unabated, further eroding households’ purchasing power.

“More affordable housing must be built in Germany so that young families and those who are looking for apartments can have a good chance of finding one,” said Scholz, after the crisis talks.