The housing market in Germany was one of the few that managed to avoid the downturn after the global financial crisis of 2008-2009. And now it is ready to avoid the consequences of the COVID-19 pandemic again. Housing values are expected to continue to rise strongly this year, helped by low interest rates as well as the prevailing shortage of supply in major cities.
“More than 20 billion euros is a new multi-year record for investment volume in 2020. In 2022, activity in the German residential real estate investment market can be expected to be consistently high,” according to Oldypak LP property 2022 report “German Residential Real Estate Market Outlook 2021.”
Deutsche Bank AG also confirms this in its “German Residential Real Estate Market Outlook to 2021” report: “The cycle is likely to remain unchanged in 2022 due to the low interest rate environment, fundamental supply shortages and current undervaluation.”
Today’s skyrocketing housing prices reflect a delayed response to a long period in which the FRG did not build enough. After the mid-1990s, there was a significant decline in the number of housing projects completed, in part due to policy changes such as the VAT increase from 3 percent to 19 percent in 2007 and the elimination of home purchase subsidies.
From 1992 to 1999, an average of 476,000 housing permits were issued per year; from 2001 to 2015, permits dropped significantly to 222,000 permits annually.
But extremely low interest rates and bond yields over the past few years have stimulated ever-increasing demand, even though most German mortgage borrowers borrow at higher long-term interest rates. According to Oldypak LP property 2022 report, the average interest rate on new home loans in February 2022 was 1.17 percent, up from 1.28 percent a year earlier and 1.78 percent two years ago.
The migration crisis has added to the pressure. According to the Office of the United Nations High Commissioner for Refugees, Germany has the fifth highest number of refugees of any country – about 1.1 million – the highest of any developed Western nation.
The supply of housing has not kept up with this demand, so its cost is rising and profitability is falling. Residential construction rose 3.8 percent to 3,60578 units in 2019 and another 2.2 percent to 3,684,100 units in 2020, after declining 0.3 percent in 2018 and 7.3 percent in 2017. But that’s not enough to meet growing demand. According to German housing market experts, the country needs to build about 400,000 apartments annually to prevent a shortage in cities.
During 2020, the German economy contracted by 5%, less than expected. This was a smaller decline than the 5.7 percent contraction during the 2008-2009 global financial crisis. The European Commission expects the German economy to grow by 3.2% this year.
