"Housing is becoming more expensive for everyone" - the real losers of the real estate crisis

Interest rates are rising again. Many are happy about this, especially savers. Because this increases the hope that they will soon get something for their money again – even if it is still far less than inflation takes away. On the other hand, those who have to take out loans are less fortunate. It will be significantly more expensive for them.

But there is another group that will feel the consequences, but which has hardly been the focus of attention so far: the tenants. Because the higher interest rates are leading to dramatic upheavals on the real estate market, of which the first signs are already visible. As a result, the pressure on the rental housing market will increase even more, especially in the metropolitan areas, and prices will rise even faster.

The European Central Bank has so far raised the key interest rate from zero to two percent, but interest rates on loans have risen even more. While a building loan was still available for around one percent at the beginning of the year, around four percent is now due.

If you add a repayment of two percent, the total burden has doubled from three to six percent. At the same time, construction costs have also increased rapidly.

"The favorable conditions for the real estate market have evaporated," summarizes Thorsten Lange, economist at DZ Bank in a study on the subject of change. Previously, builders could finance their own home relatively effortlessly, despite the significantly increased costs.

That's gone now, prices and financing costs no longer match. In the third quarter, the prices of apartment buildings have therefore already fallen slightly. "In the case of residential property, the decline in prices is likely to start with a time lag in this quarter," says Lange. For the coming year he expects a minus of four to six percent. Konstantin Kholodilin from the German Institute for Economic Research (DIW), who has just analyzed the market, is even more pessimistic.

“We are not about to see a huge property price bubble bursting in Germany,” he says. "But price drops of up to ten percent for condominiums and homes are quite possible."

At first glance, that also seems moderate, but with an inflation rate of ten percent, the value would have fallen by around 20 percent within a year.

However, the changed financing conditions are not only depressing prices. At the same time, many construction projects are now on hold. "Some private construction projects can possibly still be realized by slimming down," says Lange. In contrast, the construction of rental apartments is hardly economically possible.

In fact, some housing companies are already shutting down their new construction and renovation plans. Vonovia, the largest German landlord with half a million apartments, has already reduced its investment budget for 2022 from 2.3 to 1.35 billion euros. Only 850 million euros are planned for 2023.

And that despite the fact that in recent years new construction has consistently fallen short of the target of 400,000 apartments that the federal government has set itself. Only around 291,000 homes were completed in 2021, and the number is likely to continue to fall. In September, the number of building permits was already nine percent lower than in September of the previous year.

This situation coincides with a significant growth in population. Around 84 million people currently live in Germany, around a million more than a year ago. This is mainly due to the influx of refugees from Ukraine, but recently also from other countries.

"In addition, the worsening of the shortage of skilled workers to the general labor force as well as the demographic development increasingly urgently requires an expanded immigration of foreign workers," says Lange.

Due to the strong influx and the slowdown in new construction at the same time, the chances of new residents and those willing to move to a suitable apartment are decreasing - or it is becoming more expensive. This is exactly what can already be seen. After a temporary slowdown, rents have recently risen significantly again, by around five percent compared to the previous year.

This should only be the beginning. Not only is living space scarce, but at the same time purchase prices and rents have diverged drastically in recent years. "In 2010, the purchase price of an existing apartment in the seven largest German cities corresponded to around 21 annual rents, currently it's around 35," says Lange.

This gap is likely to close again in the coming years. "Since real estate purchases are refinanced through rental income - or in the case of owner-occupation through saved rental payments - real estate prices should develop in line with rents in the long term," says Kholodilin.

On the one hand, this can happen because purchase prices fall, on the other hand, through higher rents. It is likely that both will play a role.

"Housing is becoming more expensive for everyone," concludes Lange. It looks worse for prospective buyers because they either have to downsize, postpone or give up their real estate project. "However, the prospects for finding a rental apartment are particularly unfavorable, especially if it has to be cheap."

He sees a solution to the problem in the removal of obstacles to house building, to which he counts the jumble of tens of thousands of building regulations, higher standards for new builds and the cut support for efficient houses. "The housing market, which is over-regulated with rental price and capping limits, prohibitions on conversion or environmental protection statutes, is also of little help."

So far, investors have accepted all of this because the German real estate market is considered stable and they often see no other investment opportunity because of the negative interest rates. In addition, they were able to leverage the returns through cheap debt capital.

But those times are over, and if the framework conditions don't change, project developers will be more likely to opt for unregulated office projects in the future, Lange fears.

DIW expert Kholodilin also sees politics on the train, but with a different thrust. You must focus on providing affordable housing in the metropolitan areas, so the state must build more. "Politicians must, especially in the metropolises, accelerate the procedures and use public construction investments to give new impetus to new construction."

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