Expert on the causes of the construction crisis
“That was the death of housing”
04/08/2023, 06:48 p.m
Purchase prices fall. Building permits are falling drastically. rents go up. The real estate market slips into a crisis, triggered by inflation and interest rate increases. But the real causes lie deeper, says real estate expert Reiner Braun from Empirica. Countermeasures are difficult but possible.
Purchase prices fall. Building permits are falling drastically. rents go up. The real estate market slips into a crisis, triggered by inflation and interest rate increases. But the actual causes lie deeper, says Reiner Braun, CEO of the real estate analysis and consulting company Empirica. Countermeasures are difficult but possible.
ntv.de: The purchase prices for residential real estate fell last year for the first time in ten years. Where are we in the development of the real estate market? Has the often-cited bubble burst, is the long boom phase finally over?
Reiner Braun: That depends on which boom phase, which market cycle we are talking about. The demand cycle is unbroken, the need for apartments is still far from being met and it is continuing to rise. At the same time, however, the supply cycle is definitely over. The number of completed apartments will not only fall short of the federal government’s target of 400,000 per year, but will also fall sharply compared to the 300,000 we had last time.
Does this mean that the situation on the housing market will continue to worsen?
Yes. According to our calculations, we now need around 400,000 new apartments per year in Germany. The gap between demand and supply will continue to widen. The bottom of the development will not be reached until around 2025. Construction projects that have already started will be completed in the coming years. Because what is now breaking in first are the building permits and construction starts. In terms of completions, i.e. the number of apartments that come onto the market, this will only become apparent in two to three years – depending on the type of building. A few years ago it was said that the situation on the housing market was difficult for low earners. Then it was found that it had become difficult even for average earners. Now, at least in the locations we are looking for, things are getting difficult, even for high earners. In Berlin, for example in Prenzlauer Berg, there are simply no longer any rental apartments on the market. Then money doesn’t help anymore. The situation is already dramatic and will probably continue to deteriorate.
What led to this development? Is it just the interest rate turnaround by the central banks as a result of inflation and the increased interest costs?
The problem lies much deeper. The most important thing we need is building land! This has been the number one limiting factor in construction for years. The municipalities, especially the metropolises, would have to identify more building land. This cannot be replaced by the much-cited post-compaction, nor by additions or other measures. In addition, constantly new and stricter regulations have made building extremely expensive in recent years. In addition, the jumble of building codes, regulations and laws, which differ from country to country and even from municipality to municipality, has become almost unmanageable. Construction costs have risen about twice as fast as headline inflation over the past 20 years. Each new climate, fire or noise protection standard may be understandable on its own, but overall this has contributed to making new construction in Germany almost unaffordable.
You don’t even talk about the turnaround in interest rates and the acute rise in material costs in the last few years of the crisis. The slump in the housing market was clearly triggered by the rapidly rising interest rates.
Interest rates have risen to four percent. It used to be eight percent and that’s when construction started. Interest rates are unlikely to return to the level of 1% or less seen in recent years. We have to get used to the new, actually normal interest rate level. A lack of building land and increasing requirements have been driving prices up for years. Extremely low interest rates have only temporarily masked these problems. With cheap money you could partially compensate for that. Then, due to the pandemic and the war in Ukraine, the cost of materials suddenly rose sharply, and construction interest rates multiplied. That was the death of housing.
When the core problem is not with interest rates, but with the lack of building land and the excessive demands of bureaucracy and regulations. In your opinion, it would then be possible, with the appropriate political will, to build enough and overcome the housing crisis?
To put it bluntly: With building regulations as lean as they were in 1970, this is possible! But of course it’s not that simple. Cutting back the excessive construction bureaucracy is a difficult and lengthy process. It’s about tens of thousands of regulations and standards, which also differ from state to state. For the most part, engineers with specialist knowledge are in demand. But there are also difficult political considerations as to how much we want to pay for climate protection and security, and how this can be done most efficiently. In turn, designating building land is a matter for the municipalities and is an extremely difficult topic there. But what I think we should definitely not do is try to subsidize these structural problems!
So no additional support either for companies or for renters and homebuyers?
In the short term, equity-replacing loans for first-time buyers and completion bonuses for rental housing could help to counteract the foreseeable slump in housing construction in the coming years. However, the fundamental and long-term factors cannot be subsidized away. This also applies to the future costs of the federal government’s climate protection plans. In principle, of course, an inflation adjustment of the existing support for capital accumulation would mitigate many expenditure shocks.
These plans, especially the controversial ban on new oil and gas heating systems, hit homeowners hard. Home ownership prices are already falling and financing costs are rising. Is there a crisis brewing for homeowners? Creditreform, for example, recently warned of an increase in foreclosures.
I don’t expect that at the moment. Unlike in Anglo-Saxon countries, for example, interest rates on real estate financing in Germany are usually fixed for ten or more years. In addition, most homeowners have not financed 100 percent debt, but with a significant portion of their own capital. If someone now needs follow-up financing after 10 or 15 years, they have usually already paid off a significant part of the debt, so that they may only have to finance 80 or 70 percent of the original purchase price. That should be possible in most cases, even if the value of the house continues to fall and interest rates remain high. Homeowners who have 100 percent debt financed their purchases and the heavily indebted municipal housing companies could have bigger problems. If they can no longer bear their debts, the municipalities will have to bail them out for a lot of money.
What further development do you expect in terms of prices?
Nobody can seriously predict the price development. Various opposing forces are affecting prices: Rising interest rates and inflation have caused purchasing power, and thus demand, to collapse. On the other hand, demand is high and will probably remain so. Where a new equilibrium is found depends on many factors, such as the development of the economy or building regulations. After all, the material costs have recently fallen significantly again.
Max Borowski spoke to Reiner Braun