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Why Germany is seeing the 'worst housing shortage in 20 years'

Sarah Magill
Sarah Magill - [email protected]
Why Germany is seeing the 'worst housing shortage in 20 years'
Houses and apartments in an inner-city district of Baden-Württemberg's state capital of Stuttgart. Photo: picture alliance/dpa | Marijan Murat

Rising construction costs and interest rates, as well as an influx of refugees coming to Germany are contributing to a housing deficit which is at its highest level in 20 years, according to a recent report by real estate experts.  

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In their spring report for the German Property Federation (ZIA) published this week, the so-called "Immobilienweisen" (real estate experts) laid out the current state of the real estate industry in Germany.

The report pointed out that the current housing shortage is worse than it's been for 20 years and the experts assume that, by 2025, there will be a shortage of around 700,000 apartments in Germany.

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A "very bad awakening" is looming, warned Andreas Mattner, president of the Central Real Estate Committee (ZIA), when he handed over the report to Construction Minister Klara Geywitz (SPD). 

"1.4 million people will be looking for an apartment in 2024 and won't be able to find one if we don't turn things around immediately," Mattner said.

READ ALSO: Tenants in Germany face 'very tough year' as rents soar amid housing shortage

In January, Construction Minister Klara Geywitz admitted that the new construction target of the traffic light coalition of 400,000 apartments per year in 2022 and also in 2023 would be missed.

What's causing the deficit?

One of the main factors contributing to the shortfall is higher financing costs for construction projects due to higher interest rates and high price increases for building materials.

In the report, the real estate experts state that construction investments in many areas are less attractive than they have been for years and drastic increases in construction prices and interest rates have caused many project calculations to fall apart in recent months.

"Many project developers and housing companies lack the incentives to build because, on the one hand, the prospect of falling property prices coupled with rising construction costs and expensive (interim) financing is risky," said Lars Feld, one of the authors of the spring report.

"On the other side, tolerance for higher rents is low in the face of high inflation and low real incomes, and that reduces rental yields while interest rates rise."

A construction site for new apartments in Cologne.

A construction site for new apartments in Cologne. Photo: picture alliance/dpa | Rolf Vennenbernd

Both individual investors and building development companies are increasingly withdrawing from new construction projects, the report found.

Increased immigration is also causing a shortage of supply and continuing high demand for housing. At the end of last year, 1.1 million more people lived in Germany than a year earlier.

According to the report, the influx of Ukrainians to Germany created an additional housing demand of 200,000 - a significant figure according to the authors. In the coming years, taking into account certain factors such as further immigration from Ukraine, housing demand is expected to increase.

READ ALSO: IN NUMBERS: Over one million Ukrainians fled to Germany in 2022

The report also cites higher standards of building regulations - including environmental constraints and sound insulation regulations - and lengthy planning and approval procedures as further reasons for hampering housing construction projects.

Rents will continue to rise

The report also stated that rising rents are likely to "prevail" in the real estate market.

READ ALSO: OPINION: Germany's ruthless housing market is tough on new tenants - but there are winners

Rental costs already rose sharply last year, as new rental contracts for existing apartments were around 5.2 percent higher at the end of 2022 than a year earlier. In previous years, rates of increase between the years had commonly been between 3 and 4 percent. The national average is now €9,10 for a "cold" rent (without utility costs) per square metre.

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Will the situation improve?

A further deterioration of the situation on the housing market is a "very real danger," but "not an automatic one," Andreas Mattner, president of the Central Real Estate Committee (ZIA) said.

According to the ZIA, a total of €10 billion in government funding is needed to bring about the turnaround needed to boost new construction projects.

READ ALSO: What experts say will happen to the housing market in 2023

Mattner also pleaded for an end to the rent brake, arguing that, otherwise, the real estate industry would reap returns on investments that are lower than the financing costs. Many housing associations have also been complaining recently that new construction is no longer profitable and that they have to charge cold rents of up to €20 per square meter to cover the increased construction and interest costs.

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The report also stressed the importance of accelerating approval and planning procedures, for example by digitising building applications and lowering some building standard requirements. The experts said that it is often the high building standard requirements - such as sound insulation and requirements for energy and environmental standards - that make construction itself more expensive and complicate the planning, approval and construction process.

Construction Minister Geywitz announced on Tuesday that by the end of the year, it would be possible to submit a building application digitally everywhere in Germany.

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