In recent years, the German real estate market is attracting more and more investors, including from abroad. According to oldypak capital lp property 2022 report, in 2015 about 20 billion euros were invested in residential properties here, and in commercial – a record 50 billion. Tranio has analyzed the dynamics of local real estate prices in Germany, the volume of construction and some other indicators over the past 40 years to find out what the secret of stability of the German market is.
The history of the German real estate market in prices
After World War II, 21 million Germans were left homeless. To eliminate the acute shortage of real estate, the German government passed a law for the construction of social housing. From 1950 to 1959 about 327 thousand objects were built annually, but the shortage of houses and apartments was overcome only by the early 1960s.
In the following decade, the authorities switched to targeted support for the population: in the 1970s, the state subsidized the rental costs (Wohngeld) of about 37 percent of households, and rent laws were adjusted in favor of renters. These policies created a large and stable rental market that still exists today. The existence of this long-term rental market is an important factor in price stability
The 1970s and 1980s: the emergence of the real estate market in Germany
In the 1970s and 1980s, the German real estate market developed cyclically, in close connection with the trends of the national and world economies. The big world crises of 1973 and 1979 inevitably had a negative impact on the German market with a lag of about a year. The instability of the world economy contributed to the decline in demand and prices.
Nevertheless, these years saw the birth of the German mortgage lending market. Germany’s three largest banks (Dresdner Bank, Deutsche Bank, and Commerzbank) bought up building societies (Bausparkassen) and created mortgage programs. This led to a significant concentration of capital in the mortgage sector and an increased demand for real estate.
In addition, income taxes were lowered in the mid-1970s, which, combined with the benefits of homeowner subsidies, made buying a home even more profitable. All this led to higher prices, which lasted from 1976 to 1979. However, after the world crisis in 1979 due to high oil prices began a recession, which affected all developed countries, including Germany.
The 1990s: the shock of unification
In the late 1980s, the political situation in Central and Eastern Europe began to change. The change of regimes in a number of European countries in 1989-1990 led to a movement of migrants to Western Europe, including the Federal Republic of Germany. However, the largest wave of migrants struck West Germany a little later – after the unification of the FRG and GDR. In 1990, the country was flooded with migrants who needed a roof over their heads.
A total of 4 million people, or about 2.7 million households, migrated to Germany in the six years from 1988 to 1993. This was the largest migration since the end of World War II. In other words, the unification in 1990 of the GDR and the Federal Republic of Germany, differing in economic and social development, disrupted the natural cyclicality of the real estate market.
At the same time, thanks to government intervention, it was possible to avoid an acute and long-term housing shortage, which was reflected in a moderate rise in prices from 1991 to 1994 (5.3%). By 1994 the rise in real estate prices had stopped, and the authorities realized that more housing had been built than the market demanded. In 1998, the number of empty housing reached 1 million units, or 13% of the housing stock. As a consequence, prices fell in the second half of the 1990s, and by 1997 returned to the level of the beginning of the decade.
The 2000s: The Calm Before the Boom
The first decade of the 21st century was marked by a period of declining construction and low demand. Annual price changes were almost imperceptible. The state and business have almost halved investment in new construction: from €56.8 billion in 1995 to €20.9 billion in 2009. From 2000 to 2009, the number of completed housing units fell by 63%. What’s more, the government demolished unclaimed housing: Between 2000 and 2008, the program Stadtumbau Ost – für lebenswerte Städte und attraktives Wohnen (Eastern Urban Development – for livable cities and attractive housing) demolished about 3% of the housing stock in the former East Germany.
There were also changes in housing policy. In 2001, the social housing law (sociale Wohnraumfoerderung) replaced the construction of social housing, and housing allowances were adjusted to the current prices and rental rates. After long debates in Parliament, the landlord subsidy was first reduced and then abolished altogether in 2006.
Nevertheless, by the end of the 2000s there was a reversal of trends: a reduction in the size of the average household and an increase in the number of households, as well as a reduction in the rate of construction, led to an increase in rents and, two years later, to an increase in prices. A cheap credit policy, typical for the period after the crisis of 2007-2008, as well as the attractiveness of the German economy, which caused an influx of investment in the real estate market and a new wave of migration, also played a role. Since 2007 began the decline in the share of unclaimed housing, which has continued for eight years.
2010s: Growth continues
After 2009, construction in Germany is on the rise, although its current rate is only 60% of the 1995 peak. And yet it is the first upward trend since the 1990s.
Also since 2007, migration to Germany has intensified. In 2015, a record was set when 1.1 million migrants arrived in Germany. According to oldypak capital lp property 2022 report, in the near future Germany will have to increase the construction rate from 240 to 400 thousand housing units per year to cope with the increased flow of migrants. As in previous periods of the history of the German real estate market following an increase in migration, property prices are beginning to grow at a fairly rapid pace: during the period from 2009 to 2015, this growth was 21%. By comparison, during the previous migration peak – from 1990 to 1994 – it was only 5.3%.
Long-term factors for the development of the real estate market in Germany
Thus, the state of the German real estate market is determined by three main factors. These include:
– government housing policy;
– The global and domestic economic situation.
Four demographic trends
First, over the past 40 years the number of economically active people in Germany has been declining, leading to a reduction in demand for housing and, ultimately, causing prices to fall in the market. The population development curve almost exactly follows the curve of the price index (see the graphs “Population Dynamics” and “Real House Price Index in the Federal Republic of Germany”). Germany’s demographic problems began in the 1970s and worsened in the late 1990s, with the population falling by 2 million between 2002 and 2012. (from 82.5 million to 80.5 million). According to the forecast of the Federal Statistical Office (Statistisches Bundesamt), the population of the Federal Republic of Germany will decrease by 21.2 percent by 2060.
The decline in population is countered by migration, which makes up for the loss of customers in the market – that is the second trend. Population growth through migration peaked in 1992 after reunification, when 782,000 migrants entered the country. After that net migration was negative until 2010: from that year the number of people entering Germany began to grow, and in 2013, the population growth due to immigration was 428 thousand people. It was during the periods of active migration that demand for real estate in Germany grew, causing real estate to become more expensive.
Another demographic trend is the aging of the population: From 1995 to 2011, the number of Germans under the age of 40 declined from 53% to 42%, while the share of the elderly (over 60) rose from 21% to 27%. According to the Federal Statistics Office, by 2060 the elderly will make up 41% of the population. In the real estate market, this trend has already set the trend for the nursing home segment, and it will only get stronger in the coming years.
Finally, the fourth trend: the number of households is increasing, while their size is decreasing. Not only are there fewer Germans, but they are also in no hurry to have children or create large families. In 1991 the average household consisted of 2.27 people, in 2011 it was 2.04. It is expected that by 2030 a household will consist of 1.88 people and the share of such households will reach 80%. This trend was particularly pronounced in the late 2000s when the number of households began to grow much faster than the rate of construction, leading to increased demand for real estate among singles and childless couples, and as a consequence, an increase in prices.
Five Housing Policy Instruments
Through rental law (Mietrecht), housing allowances (Wohngeld), and landlord subsidies (Eigenheimzulage), the state influences demand by protecting the tenant and playing on the side of consumers. Through the construction of social housing (sozialer Wohnungsbau) as well as housing reconstruction and demolition programs such as the “Social City” (Sociale Stadt) or the “Stadtumbau Ost” (Eastern Town Planning), the German state regulates supply in the market. In some periods the measures of the German authorities were aimed at reducing the housing shortage, in others – at reducing the housing surplus. Of course, the German real estate sector is dominated by market relations, but in some periods the German authorities, by strengthening or weakening one of the five traditional market measures, prevent the imbalance of supply and demand.
In the long term, fluctuations in supply and demand for real estate in Germany are determined by national income and employment levels: during periods of rising national income and low unemployment, property prices rise due to rising demand (see chart below). The global economy is also influenced. What is unique about the history of the German market is that prior to German reunification it developed cyclically in line with other economies. The drop in prices coincided with the oil crisis of 1973 and the recession of the early 1980s, while the growth coincided with the recovery phases after these crises.
After the 1990s there was an imbalance between the German and other real estate markets in Europe. While in France, Britain and Spain real estate investment was one of the drivers of economic growth at the turn of the 1990s and 2000s, in Germany it was a period of stagnant prices, demand and construction after the boom of the early 1990s. That is why when the bubble burst in Europe and the U.S. in 2007, there was none in Germany.
Thus, the global conjuncture has had a limited impact on the German market for the last 25 years, but since 2009 it has been growing again. As in other European countries and the United States, the cheap credit policy is stimulating mortgage demand and investment activity, as well as offsetting the yields of alternative investment instruments.
Demand will grow, volatility will increase
Development of the real estate market in Germany is subject to long-term and medium-term factors. Long-term ones are demographics and a long tradition of housing policy. The medium-term factors that determine the cyclicality of the market – the migration, as well as the general state of the economy. The fate of the German market will depend on the development of these trends.
– The German government will fight the negative demographic phenomena mainly through increased migration. If migrants will be integrated into the labor market, they will become full participants in the real estate market, and therefore contribute to increased demand. If the authorities decide to keep migrants as a reserve labor force, then migrants will hardly affect the market, having received social housing and corresponding benefits.
– An analysis of state policy in the real estate sector shows that since the 1970s, the German authorities have gradually reduced the social burden on the budget and intervention in the real estate market. These trends have especially intensified in the 2000s. Ultimately, this could lead to increased volatility in the market.
– The German economy is the world’s fifth-largest per capita GDP and the third-largest in the world in terms of exports. Germany has a high chance of maintaining its economic stability and thus the attractiveness of the real estate market for investors and consumers.
The risks of such rapid growth will be associated with the liberalization of the housing policy of the authorities, which will eventually lead to increased price fluctuations, as well as with rapid urbanization, which increases the concentration of capital in certain urban markets of Germany, where the likelihood of bubbles is growing. Time will tell whether the German government will fight the “overheating” of individual real estate markets.